Financialization, Crisis and Commodity Correlation Dynamics

We study bi-variate conditional volatility and correlation dynamics for individual commodity futures and financial assets from May 1990-July 2009 using DSTCC-GARCH (Silvennoinen and Terasvirta 2009). These models allow correlation to vary smoothly between extreme states via transition functions driven by indicators of market conditions. Expected stock volatility and money manager open interest in futures markets are relevant transition variables. Results point to increasing integration between commodities and financial markets. Higher commodity returns volatility is predicted by lower interest rates and corporate bond spreads, US dollar depreciations, higher expected stock volatility and financial traders open positions. We observe higher and more variable correlations between commodity futures and financial asset returns, particularly from mid-sample, often predicted by higher expected stock volatility. For many pairings, we observe a structural break in the conditional correlation processes from the late 1990s.commodity futures; double smooth transition; conditional correlation; financialization

The Dynamics of Energy-Grain Prices with Open Interest

This paper examines the short- and long-run daily relationships for a grain-energy nexus that includes the prices of corn, crude oil, ethanol, gasoline, soybeans, and sugar, and their open interest. The empirical results demonstrate the presence of these relationships in this nexus, and underscore the importance of ethanol and soybeans in all these relationships. In particular, ethanol and be considered as a catalyst in this nexus because of its significance as a loading factor, a long-run error corrector and a short-run adjuster. Ethanol leads all commodities in the price discovery process in the long run. The negative cross-price open interest effects suggest that there is a money outflow from all commodities in response to increases in open interest positions in the corn futures markets, indicating that active arbitrage activity takes place in those markets. On the other hand, an increase in the soybean open interest contributes to fund inflows in the corn futures market and the other futures markets, leading to more speculative activities in these markets. In connection with open interest, the ethanol market fails because of its thin market. Finally, it is interesting to note that the long-run equilibrium (cointegrating relationship), speeds of adjustment and open interest across markets have strengthened significantly during the 2009-2011 economic recovery period, compared with the full and 2007-2009 Great Recession periods.

The Dynamics of Energy-Grain Prices with Open Interest

This paper examines the short- and long-run daily relationships for a grain-energy nexus that includes the prices of corn, crude oil, ethanol, gasoline, soybeans, and sugar, and their open interest. The empirical results demonstrate the presence of these relationships in this nexus, and underscore the importance of ethanol and soybeans in all these relationships. In particular, ethanol and be considered as a catalyst in this nexus because of its significance as a loading factor, a long-run error corrector and a short-run adjuster. Ethanol leads all commodities in the price discovery process in the long run. The negative cross-price open interest effects suggest that there is a money outflow from all commodities in response to increases in open interest positions in the corn futures markets, indicating that active arbitrage activity takes place in those markets. On the other hand, an increase in the soybean open interest contributes to fund inflows in the corn futures market and the other futures markets, leading to more speculative activities in these markets. In connection with open interest, the ethanol market fails because of its thin market. Finally, it is interesting to note that the long-run equilibrium (cointegrating relationship), speeds of adjustment and open interest across markets have strengthened significantly during the 2009-2011 economic recovery period, compared with the full and 2007-2009 Great Recession periods.Energy-grain price nexus; open interest; futures prices; ethanol; crude oil; gasoline; corn; soybean; sugar; arbitrage; speculation

The Dynamics of Energy-Grain Prices with Open Interest

This paper examines the short- and long-run daily relationships for a grain-energy nexus that includes the prices of corn, crude oil, ethanol, gasoline, soybeans, and sugar, and their open interest. The empirical results demonstrate the presence of these relationships in this nexus, and underscore the importance of ethanol and soybeans in all these relationships. In particular, ethanol and be considered as a catalyst in this nexus because of its significance as a loading factor, a long-run error corrector and a short-run adjuster. Ethanol leads all commodities in the price discovery process in the long run. The negative cross-price open interest effects suggest that there is a money outflow from all commodities in response to increases in open interest positions in the corn futures markets, indicating that active arbitrage activity takes place in those markets. On the other hand, an increase in the soybean open interest contributes to fund inflows in the corn futures market and the other futures markets, leading to more speculative activities in these markets. In connection with open interest, the ethanol market fails because of its thin market. Finally, it is interesting to note that the long-run equilibrium (cointegrating relationship), speeds of adjustment and open interest across markets have strengthened significantly during the 2009-2011 economic recovery period, compared with the full and 2007-2009 Great Recession periods.Energy-grain price nexus, open interest, futures prices, ethanol, crude oil, gasoline, corn, soybean, sugar, arbitrage, speculation.

PRICE DISCOVERY INVESTIGATION BETWEEN THE CHINESE SOYBEAN AGRICULTURAL FUTURES AND SPOT MARKETS

Currently, the Chinese soybean market is the 2nd largest soybean market around the world in terms of trading volume and growth opportunities. However, the number of relevant academic researches is not sufficient to investigate the fast growing Chinese futures markets. This thesis investigates the price discovery function and cointegration relationship between the soybean spot and futures markets in China from 2009 to 2013. The analysis in this thesis is conducted by using daily data. In the empirical results, lead and lag relationship between spot and futures is demonstrated. Besides, heteroskedasticity test, ADF unit root test, cointegration test, vector error correction model (VECM) estimation, and Granger causality test are conducted in sequence. In addition, impulse response function and variance decomposition are illustrated. The comprehensive results show that cointegration relationship does exist between the soybean spot and futures markets in China, and unidirectional causality between the markets is identified. Futures tend to Granger cause and price discovers spot, though spot suggests insufficient evidence to Granger cause and price discover futures.fi=Opinnäytetyö kokotekstinä PDF-muodossa.|en=Thesis fulltext in PDF format.|sv=Lärdomsprov tillgängligt som fulltext i PDF-format

Causality Between Market Liquidity and Depth for Energy and Grains

This paper examines the roles of futures prices of crude oil, gasoline, ethanol, corn, soybeans and sugar in the energy-grain nexus. It also investigates the own- and cross-market impacts for lagged grain trading volume and open interest in the energy and grain markets. According to the results, the conventional view, for which the impacts are from oil to gasoline to ethanol to grains in the energy-grain nexus, does not hold well in the long run because the oil price is influenced by gasoline, soybeans and oil. Moreover, gasoline is preceded by only the oil price and ethanol is not foreshadowed by any of the prices. However, in the short run, two-way feedback in both directions exists in all markets. The grain trading volume effect across oil and gasoline is more pronounced in the short run than the long run, satisfying both the overconfidence/disposition and new information hypotheses across markets. The results for the ethanol open interest shows that money flows out of this market in both the short and long run, but no results suggest across market inflows or outflows to the other grain markets.energy;Causality;depth;grains;market liquidity

Causality Between Market Liquidity and Depth for Energy and Grains

This paper examines the roles of futures prices of crude oil, gasoline, ethanol, corn, soybeans and sugar in the energy-grain nexus. It also investigates the own- and cross-market impacts for lagged grain trading volume and open interest in the energy and grain markets. According to the results, the conventional view, for which the impacts are from oil to gasoline to ethanol to grains in the energy-grain nexus, does not hold well in the long run because the oil price is influenced by gasoline, soybeans and oil. Moreover, gasoline is preceded by only the oil price and ethanol is not foreshadowed by any of the prices. However, in the short run, two-way feedback in both directions exists in all markets. The grain trading volume effect across oil and gasoline is more pronounced in the short run than the long run, satisfying both the overconfidence/disposition and new information hypotheses across markets. The results for the ethanol open interest shows that money flows out of this market in both the short and long run, but no results suggest across market inflows or outflows to the other grain markets.Causality, market liquidity, depth, energy, grains.

Price Bubbles in Chinese Agricultural Commodity Market

This cumulative dissertation presents four contributions that attempt to shed light on the issues regarding price bubbles in Chinese agricultural commodity market. Given that the public and policymakers show their concern on the price bubbles in Chinese agricultural commodity market, chapter 2 and 3 investigate the origin of price bubbles in futures and spot markets, respectively. In particular, after accurately identifying the bubble dates in agricultural futures market and fixing the estimation bias of rare events models, our empirical results in chapter 2 indicate that bubble episodes only account for a very limited proportion of the sample period, meanwhile, China’s corn and soybeans markets respond differently to the speculative activity and external shocks from international markets. Price bubbles are more likely to be associated with strong economic activity, high interest rates and low inflation levels. Furthermore, by gauging the synchronization level of bubble occurrences between futures and spot markets in chapter 3, we find that even cointegrated futures and spot prices for agricultural commodities seldom bubble together. Further analysis through a regime-switching approach of price transmission reveals that the adjustment effect of futures prices on spot prices is the lowest during the regime where bubbles occur the most frequently for spot prices, while the spot price returns are more likely to be affected by its own lagged terms. All these results challenge the idea that bubbles are originated from over-financialization in futures markets and are then transmitted to spot markets. Therefore, we conclude that futures price bubbles are more sensitive to fundamental factors, while spot price bubbles are more likely to be affected by their own market features. Apart from empirical analyses on the origin of price bubbles, it is widely believed that bubbles could distort resource allocation and a recession usually follows the collapse of bubbles. Inspired by the findings from chapter 2 and 3, chapter 4 attempts to build a systematic theoretical framework that explains the observed economic process with bubbles. From a new perspective of firm growth, we construct a theoretical model to describe the evolvement of bubbles, including their origin, development, collapse, and their effect on the output of economy. Following our research topic, chapter 5 tends to investigate the effects of the newly established futures contract for apples in China. The results of various tests suggest that the apple futures market does not serve well for the price discovery and may reduce the spot price volatility to some extent. In order to improve the efficiency of the apple futures market, the regulators should consider effective measures to attract more commercial traders from different regions in China into the futures market

Price, Return and Volatility Linkages of Base Metal Futures traded in India

In this study the price, return and volatility behaviour of base metals (aluminium, copper, nickel, lead and zinc) which are traded on Indian commodity exchange - Multi Commodity Exchange (MCX) and International commodity exchange – London Metal Exchange (LME) are analysed. The time period chosen for the study is from November 1st, 2006 to January 30th, 2013. The paper attempts to demonstrate the linkages in price, return and volatility across the two markets for the five metals through three models - (a) Price – Co-integration methodology and Error Correction Mechanism Model (b) Return and Volatility – Modified GARCH model (c) Return and Volatility - ARMA-GARCH in mean model – Innovations Model. The findings of the paper suggest that there exists a strong linkage across the price, return and volatility of futures contracts traded on MCX and LME respectively. Given the level of linkages, the imposition of Commodity Transaction Taxes on sellers at the time of trading of these five base metals on Indian Commodity exchanges would lead to a fall in their trading volume as traders and speculators would escape the higher transaction cost of hedging by investing in International Exchanges instead of Indian Commodity exchanges. This movement from Indian to the International markets would defy the intention of imposition of the tax, as the government expects to earn revenue from the tax, and this would also defeat the very purpose of price discovery in the commodity exchanges in India