Speculation and volatility—A time-varying approach applied on Chinese commodity futures markets

Experts have long discussed and empirically investigated whether speculative activity increases volatility on commodity futures markets. Little empirical research, however, analyzes the role of speculators on commodity futures markets in China. Using time-varying vector autoregression models with stochastic volatility, this paper investigates for four heavily traded metal and agricultural contracts, how the relationship between returns volatility and speculation evolves over time. Our findings indicate that speculative activity has little to no impact on volatility. On the contrary, for all commodities examined, returns volatility seems to amplify speculation.     

Samuelson hypothesis,arbitrage activity,and futures term premiums

The Samuelson hypothesis asserts that futures volatility increases as maturity decreases. On the basis of 10 US commodity futures and by capturing the dynamics of the futures volatility terms structure with three factors, we show that in most markets the slope factor is strongly negative in certain periods and at best only weakly negative in other periods. High inventory levels are found to correspond to flatter volatility term structures in seven futures. This finding is consistent with the linkage between carry arbitrage and the Samuelson hypothesis. We also find that a flatter volatility term structure corresponds to lower absolute futures term premiums.     

An analysis of illiquidity in commodity markets

We examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.     

The information content of implied volatility in agricultural commodity markets

In this article we compare the incremental information content of lagged implied volatility to GARCH models of conditional volatility for a collection of agricultural commodities traded on the New York Board of Trade. We also assess the relevance of the additional information provided by the implied volatility in a risk management framework. It is first shown that past squared returns only marginally improve the information content provided by the lagged implied volatility. Secondly, value‐at‐risk (VaR) models that rely exclusively on lagged implied volatility perform as well as VaR models where the conditional variance is modelled according to GARCH type processes. These results indicate that the implied volatility for options on futures contracts in agricultural commodity markets provides relevant volatility information that can be used as an input to VaR models. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:441–454, 2003     

基于 DCC-GARCH的中国大宗商品 金融化研究

本文选取2005年1月4日至2016年9月30日农产品类、金属类和工业品类等中国和国际大宗商品期货市场交易品种,以及国内外主要股票市场指数的日收益率,基于DCC--GARCH模型分析了期货市场和股票市场的波动性溢出关系和动态相依性。结果发现,股票市场对中国商品期货有波动率溢出效应,但是不同类型的大宗商品其波动率溢出效应有明显差异。这说明:中国大宗商品市场存在金融化现象,但是不同类型的大宗商品金融化的程度不同,和国际大宗商品期货市场相比,中国市场的金融化程度总体偏低。     

The Effect of 2008 Crisis on the Volatility Spillovers among Six Major Markets

The scope of this paper is to determine whether global stock markets function differently under conditions of economic crisis by measuring volatility spillovers between six major markets, namely the US, the UK, Germany, Spain, Turkey, and Greece. We examine the volatility spillover effects of the 2008 US financial crisis to these six major markets using daily stock returns from January 2003 to December 2014, before, during, and after the 2008 financial crisis. We combine the Diebold and Yilmaz methodology with the stochastic volatility model of Taylor implemented through the sequential Efficient Importance Sampling method of Richard and Zhang to obtain variance decompositions derived from an estimated vector autoregressive model. The empirical findings suggest that stock markets tend to show increased volatility spillovers during the crisis period, thus resulting in lesser diversification benefits for investors.     

Volatility spillover and hedging effectiveness among China and emerging Asian Islamic equity indexes

We study the volatility spillover between China and Asian Islamic stock markets. We use a sample of six Islamic MSCI indices from the Asian region, namely China, India, Malaysia, Indonesia, Korea and Thailand obtained from MSCI (Morgan Stanley Capital International). In this paper we analyze the importance of considering spillover effects between emerging Asian Islamic indexes based on the Bivariate VARMA-BEKK-AGARCH model of McAleer et al. (2009), which includes spillover and asymmetric effects. We compute after the effectiveness of portfolio diversification based on the conditional volatility of returns series. Results show a significant positive and negative return spillover from China to selected Asian Islamic stock market and bidirectional volatility spillovers between China, Korea and Thailand Islamic market showing evidence of short-term predictability on Islamic Chinese stock market movements. However there is no short term volatility persistence in India, Indonesia and Malaysia. GARCH results show no persistence in volatility spillover effect in long term from Chinese to Indian, Indonesian and Korean Islamic stock market. Our findings are beneficial for international portfolio diversification for policy makers and investors since the results of portfolio management and hedging effectiveness ratio are different to previous studies.     

Volatility Spillovers and the Risk-Return Relation Between Stock and Foreign Exchange Markets in Brazil

We examine the evidence of mean and volatility spillovers between stock and foreign exchange markets in Brazil with multivariate GARCH models and nonlinear Granger causality tests. We also use a multivariate GARCH-in-mean model to assess the relationship between risk and return in these markets. The results indicate that the stock market leads the foreign exchange market in price formation and that nonlinear Granger causalities from the exchange market to the stock market do occur. Part of these nonlinear causalities are explained by volatility spillovers. We show that exchange rate volatility affects not only stock market volatility but also stock returns.     

A maximal affine stochastic volatility model of oil prices

This study develops and estimates a stochastic volatility model of commodity prices that nests many of the previous models in the literature. The model is an affine three‐factor model with one state variable driving the volatility and is maximal among all such models that are also identifiable. The model leads to quasi‐analytical formulas for futures and options prices. It allows for time‐varying correlation structures between the spot price and convenience yield, the spot price and its volatility, and the volatility and convenience yield. It allows for expected mean‐reversion in the short term and for an increasing expected long‐term price, and for time‐varying risk premia. Furthermore, the model allows for the situation in which options' prices depend on risk not fully spanned by futures prices. These properties are desirable and empirically important for modeling many commodities, especially crude oil. © 2009 Wiley Periodicals, Inc. Jrl Fut Mark 30:101–133, 2010     

Arbitrage,cointegration, and the joint dynamics of prices across discrete commodity futures auctions

Underlying the search for arbitrage opportunities across commodity futures markets that differ in market structure is the idea that the futures prices for similar commodities that are traded on different exchanges adjusted for differences in currency, delivery time (if any), location, and market structure are equal. This article examines price linkages in competing discrete commodity futures auction markets. We find no evidence of cointegration of futures prices of similar commodities traded on two contemporaneous discrete auction futures exchanges in Asia. We also find no evidence of arbitrage activities across these two Asian exchanges, though this does not preclude arbitrage activities with North American continuous auction markets. This lack of cointegration may be due to nonstationarities in the trading cost component. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 799–815, 1999     

The global financial crisis: An analysis of the spillover effects on African stock markets

This paper examines the relative importance of the global and regional markets for financial markets in developing countries, particularly during the US financial crisis and the European sovereign debt crisis. Specifically, we examine the way in which the degree of regional (seven African markets combined), global (China, France, Germany, Japan, the UK and the US), commodity (gold and petroleum), and nominal effective exchange rate (Euro and US dollar) spillovers to individual African countries evolved during the two crises through the econometric method introduced by Diebold and Yilmaz (2012). We find that African markets are most severely affected by spillovers from global markets and only modestly from commodity and currency markets. Conversely, regional spillovers within Africa are smaller than global ones, and hence, African markets are insulated from global crises. We also find that the aggregated spillover effects of European countries to the African markets exceeded the corresponding effects of the US, even in the wake of the US financial crisis.     

Intertemporal volatility and price interactions between Australian and Japanese spot and futures stock index markets

Previous studies have examined causality within and between different spot and futures markets with a motivation to discover market comovements, price leadership effects, and, more recently, volatility spillovers across markets. However, the empirical framework within which this is accomplished tends not to analyze explicitly foreign spillover effects upon a spot–futures relationship, which may significantly alter the equilibrium between these markets. This will then have a direct impact upon the estimation of dynamic risk adjustments that occur from the interaction between these markets. This article develops a quadvariate simultaneous-equation EC-ARCH model with an emphasis on volatility spillovers as a better alternative methodology to evaluate these relationships from a different perspective. This model is applied to examine the interaction between the Australian and Japanese spot and futures stock index markets, which allows for an Australian or Japanese futures trader to analyze the impact of foreign cash and futures markets, as well as the local cash market, on the local futures market in a single coherent framework. This type of analysis is not possible using previous paradigms, because they allow the trader only to examine the impact of local cash and foreign futures markets in separate settings. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 523–540, 1999     

Does global fear predict fear in BRICS stock markets? Evidence from a Bayesian Graphical Structural VAR model

We examine the predictive power of implied volatility in the commodity and major developed stock markets for the implied volatility in individual BRICS stock markets. We use daily data from March 2011 to October 2016 and employ the newly developed Bayesian Graphical Structural Vector Autoregressive (BGSVAR) model of Ahelegbey et al. (2016). Evidence suggests that the predictability of individual implied volatilities in BRICS is generally a function of both global and within the group stock market implied volatilities, and that the role of commodity market volatility is marginal, except for South Africa. Important implications for policy-makers and portfolio-managers are discussed.     

Commodity Markets and Commodity Mutual Funds

Fundamental economic factors—market demand and supply conditions—provide the most consistent explanation for trends in commodity prices from 2004 to 2011. This paper presents empirical evidence that the rise and fall of commodity prices on a monthly basis can be strongly linked to the value of the U.S. dollar and the world business cycle—in particular, to the strength or weakness in emerging market economies such as China, Brazil, India, and Russia. Despite concerns raised by some policymakers that increased commodity index investment (the financialization of commodities) has driven commodity price movements, numerous academic studies have concluded that index-based investing has not moved prices or exacerbated volatility in commodity markets in recent years. An examination of weekly and monthly net flows into commodity mutual funds reveals that these flows have little or no effect on the overall growth rate of commodity prices. In particular, weekly flows into commodity mutual funds do not lead to future commodity price changes. These results are consistent with academic papers that find little or no impact of commodity index investors on commodity prices in individual markets. The paper concludes by briefly discussing three key factors that illustrate why flows into commodity mutual funds cannot explain commodity price movements.     

Economic uncertainty,trading activity,and commodity futures volatility

This paper investigates the dynamics of commodity futures volatility. I derive the variance decomposition for the futures basis and show unexpected excess returns result from new information about expected future interest rates, convenience yields, and risk premia. Measures of uncertainty in economic conditions have significant predictive power for realized volatility of commodity futures returns, after controlling for lagged volatility, returns, commodity index trading, hedging pressure, and other trading activity, even during the so-called “index financialization” period. During this period, hedge fund performance predicts volatility in grain commodities, which are affected by the US ethanol mandate.     

The economic value of volatility transmission between the stock and bond markets

This study has two main objectives. Firstly, volatility transmission between stocks and bonds in European markets is studied using the two most important financial assets in these fields: the DJ Euro Stoxx 50 index futures contract and the Euro Bund futures contract. Secondly, a trading rule for the major European futures contracts is designed. This rule can be applied to different markets and assets to analyze the economic significance of volatility spillovers observed between them. The results indicate that volatility spillovers take place in both directions and that the stock‐bond trading rule offers very profitable returns after transaction costs. These results have important implications for portfolio management and asset allocation. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1066–1094, 2008     

Managed futures,positive feedback trading,and futures price volatility

A major issue in recent years is the role that large, managed futures funds and pools play in futures markets. Many market participants argue that managed futures trading increases price volatility due to the size of managed futures trading and reliance on positive feedback trading systems. The purpose of this study is to provide new evidence on the impact of managed futures trading on futures price volatility. A unique data set on managed futures trading is analyzed for the period 1 December 1988 through 31 March 1989. The data set includes the daily trading volume of large commodity pools for 36 different futures markets. Regression results are unequivocal with respect to the impact of commodity pool trading on futures price volatility. For the 72 estimated regressions (two for each market), the coefficient on commodity pool trading volume is significantly different from zero in only four cases. These results constitute strong evidence that, at least for this sample period, commodity pool trading is not associated with increases in futures price volatility. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 759–776, 1999     

Volatility spillover effects and cross hedging in corn and crude oil futures

Using a volatility spillover model, we find evidence of significant spillovers from crude oil prices to corn cash and futures prices, and that these spillover effects are time‐varying. Results reveal that corn markets have become much more connected to crude oil markets after the introduction of the Energy Policy Act of 2005. Furthermore, when the ethanol–gasoline consumption ratio exceeds a critical level, crude oil prices transmit positive volatility spillovers into corn prices and movements in corn prices are more energy‐driven. Based on this strong volatility link between crude oil and corn prices, a new cross‐hedging strategy for managing corn price risk using oil futures is examined and its performance is studied. Results show that this cross‐hedging strategy provides only slightly better hedging performance compared with traditional hedging in corn futures markets alone. The implication is that hedging corn price risk in corn futures markets alone can still provide relatively satisfactory performance in the biofuel era. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark     

Price discovery in commodity derivatives: Speculation or hedging?

We investigate whether commodity futures or options markets play a more important role in the price discovery process in the six most actively traded markets: crude oil, natural gas, gold, silver, corn, and soybeans. Using new information leadership techniques, we report new evidence and report that both markets make a meaningful contribution to price discovery in recent times; however, on average, options lead futures in reflecting new information for a majority of these commodities. We find that increased speculation, rather than hedging activity, in commodity derivatives is a key determinant of price discovery in the options markets.     

Informed options trading on the implied volatility surface: A cross-sectional approach

This study investigates the cross-sectional implication of informed options trading across different strikes and maturities. We explore the term structure perspective of the one-way information transmission from options markets to stock markets by adopting well-known option-implied volatility measures to examine stock return predictability. Using equity options data for U.S. listed stocks spanning 2000–2013, we find that the shape of the long-term implied volatility curve exhibits extra predictive power for stock returns of subsequent months even after orthogonalizing the short-term components. Our findings indicate that the inter-market information asymmetry rapidly disappears before the expiration of long-term option contracts.