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The Relationship Between Futures Market Speculation and Spot Market Volatility

Author : Xuemei Xiao

Publisher :

Page : 74 pages

File Size : 31,57 MB

Release : 2018

Category :

ISBN :

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Book Description

This thesis investigates the relationship between speculation in futures markets and expected and unexpected volatility in the spot markets for 21 different commodities. I use the index of adequate speculation, INDADSP, and the index of excess speculation, INDEXSP, developed and estimated by Shanker (2017), to capture the degree of speculation required to meet hedging demand, and the degree of speculation in excess of hedging demand, respectively. For comparison, I also use Working's (1960) speculative index T, as a measure of speculation. I estimate the expected volatility (EV) and unexpected volatility (UEV) of the spot market using a GARCH model. The empirical results indicate that the GJR-GARCH model with a Student's t distribution for the error term is the most appropriate model, among the GARCH-family of models, to capture the volatility of 17 of the 21 spot commodity returns. However, the results of feeder cattle indicate the exists of serial correlation of the residuals for all three GARCH model I used, so I drop it and do the further analysis for the rest of 20 commodities and financial contracts. For each commodity, I create time series of matched weekly indices of speculation, expected volatility and unexpected volatility. Next, I investigate the long-run and short-run relationships between volatilities and speculation using an autoregressive distributed lag model. The results indicate that there is a long term relationship between expected and unexpected volatility and the speculative indices, for all commodities, except the Euro, Eurodollar, and U.S. T-bond, and a short term relationship between volatilities and speculation for all commodities. Finally, I apply the Toda-Yamamoto test to investigate the causal relationship between speculation in futures markets and volatility in spot markets. I find that speculation tends to lead expected volatility more than unexpected volatility for the majority of commodities/financial assets. Expected volatility, rather than unexpected volatility, tends to lead speculation for a majority of commodities/financial assets. There is a bidirectional causality between expected volatility and INDADSP, INDEXSP, and T and between unexpected volatility and INDEXSP for several different commodities and financial assets. However, there is no bidirectional causality between unexpected volatility and the speculative indices INDADSP and T for all 20 commodities/financial assets.



Trading Mechanisms, Speculative Behavior of Investors, and the Volatility of Prices

Author : Hun Y. Park

Publisher :

Page : 56 pages

File Size : 14,55 MB

Release : 1989

Category : Prices

ISBN :

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Book Description

This paper compares the volatility of spot prices (dealership market) with that of futures prices (auction market) to test the implications of different trading mechanisms for the volatility of prices. First, a natural estimator of the volatility is sued. Using the intraday data of the major Market Index and its futures prices, we show that the volatility of opening prices is higher than that of closing prices not only in the spot market but in the futures market, and that the intraday volatility patterns are U-shaped in both markets. Of particular interest is that futures prices do not appear to be as volatile as spot prices when the natural estimator of volatility is used, to the contrary of the conventional wisdom. We argue that the different volatility patterns during the day are not necessarily due to the different trading mechanisms, auction market versus dealership market. Instead, after developing a simple theoretical model of speculative prices, we show that at least part of the different volatility patterns during the day may be attributable to speculative behavior of investors based on heterogeneous information. In addition, we further investigate the volatilities of spot and futures prices using a temporal estimator of price volatility as an alternative to the natural estimator. Based on the temporal estimator, we cannot find any systematic pattern of volatilities during the day in both spot and futures markets, and that futures prices appear to be more volatile than spot prices in terms of how quickly the price moves beyond a given unit price level, but not in terms of how much the price changes during a given unit time interval. Some policy implications are also discussed.



Effect of Futures Trading on Spot Market Volatility

Author : Brajesh Kumar

Publisher :

Page : 25 pages

File Size : 33,97 MB

Release : 2011

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ISBN :

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Book Description

This study investigates the relationship between futures trading activity and spot market volatility for agricultural, metal, precious metals and energy commodities in Indian commodity derivatives market. This article contributes to the debate whether the futures trading in Indian commodity futures market stabilizes or destabilizes spot market. We explore this issue by modeling contemporaneous as well as dynamic relationship between spot volatility and futures trading activity including trading volume (speculative/day trading) and open interest (hedging). Following Bessembinder and Senguin (1992), we examine contemporaneous relationship through augmented GARCH model in which spot volatility is modeled as GARCH (1,1) process and trading activity is used as explanatory variable. We also decompose futures trading volume and open interest series into expected and unexpected component. The lead-lag relationship between spot price volatility and futures trading volume and open interest is investigated through VAR model. Granger causality tests, forecast error variance decompositions and impulse response function are used to understand the dynamic relationship between these variables. We found that both expected and unexpected futures trading volume affects contemporaneous spot volatility positively. However, in case of agricultural commodities only unexpected volume affects the contemporaneous spot volatility. Granger causality tests, forecast error variance decompositions and impulse response function confirm that the lagged unexpected volatility causes spot price volatility for all commodities. The effect of speculative/day trading activity measured by trading volume on spot market volatility is positive. However, hedging activity measured by open interest does not show significant effect on spot market volatility. We do not find any effect of spot volatility on futures trading activity for most of the commodities.





The World Scientific Handbook of Futures Markets

Author : Anastasios G. E. T. Al MALLIARIS

Publisher : World Scientific

Page : 844 pages

File Size : 13,38 MB

Release : 2015-08-06

Category : Business & Economics

ISBN : 9814566926

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Book Description

"The World Scientific Handbook of Futures Markets serves as a definitive source for comprehensive and accessible information in futures markets. The emphasis is on the unique characteristics of futures markets that make them worthy of a special volume. In our judgment, futures markets are currently undergoing remarkable changes as trading is shifting from open outcry to electronic and as the traditional functions of hedging and speculation are extended to include futures as an alternative investment vehicle in traditional portfolios. The unique feature of this volume is the selection of five classic papers that lay the foundations of the futures markets and the invitation to the leading academics who do work in the area to write critical surveys in a dozen important topics."--$cProvided by publisher.





Futures Markets (Routledge Revivals)

Author : Barry Goss

Publisher : Routledge

Page : 227 pages

File Size : 23,90 MB

Release : 2013-05-02

Category : Business & Economics

ISBN : 1135047502

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Book Description

First published in 1986, this book discusses many important aspects of the theory and practice of Futures Markets. It describes how they, at the time, grew to be an increasingly important feature of the world's major financial centres. Indeed, they adopted the role of being efficient forward pricing mechanisms and this was reflected by the interest of economists in the study of risk, uncertainty and information. Here, the contributors focus on areas that were of concern in the late 1980s such as feasibility, forward pricing and returns, and the modelling of price determination in Futures Markets. Evidence is drawn from twenty-five different commodities representing all the major commodity groups; and from all the world's major centres of Futures Trading.



Does Speculation Drive Commodity Prices? Evidence from the Market for Corn

Author : Niklas Humann

Publisher : GRIN Verlag

Page : 46 pages

File Size : 26,71 MB

Release : 2021-09-22

Category : Business & Economics

ISBN : 3346496171

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Book Description

Seminar paper from the year 2020 in the subject Economics - Finance, grade: 1,0, University of Münster, language: English, abstract: This seminar paper reviews the literature on futures markets as well as the recent food crisis and presents an empirical investigation of the influence of (index) speculation on the corn price. My findings are in line with most of the other empirical conclusions that, rather than speculation, factors from the real and monetary economy played a role in the spike of commodity prices. For centuries, corn has been one of the most produced crops in the world, used to feed people, livestock and machines. During the last quarter of the twentieth-century, world food prices declined by more than 50 percent, thereby improving the nourishment of people all over the world. However, this extensive decline also raised calls for protectionist policies, aimed at defending the welfare of commodity producers. Starting in the early 2000s, all classes of commodities have experienced hefty price increases. The price for corn increased by more than 250 percent in roughly three years (2005-2008). The resulting food crisis devastated low-income communities around the globe, with the already large part of their income they spent on food becoming even more substantial, causing hunger and malnutrition. While a variety of explanations for this crisis have been offered, some were quick to blame excessive (index) speculation.



Oil Price Volatility and the Role of Speculation

Author : Samya Beidas-Strom

Publisher : International Monetary Fund

Page : 34 pages

File Size : 11,27 MB

Release : 2014-12-12

Category : Business & Economics

ISBN : 1498333486

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Book Description

How much does speculation contribute to oil price volatility? We revisit this contentious question by estimating a sign-restricted structural vector autoregression (SVAR). First, using a simple storage model, we show that revisions to expectations regarding oil market fundamentals and the effect of mispricing in oil derivative markets can be observationally equivalent in a SVAR model of the world oil market à la Kilian and Murphy (2013), since both imply a positive co-movement of oil prices and inventories. Second, we impose additional restrictions on the set of admissible models embodying the assumption that the impact from noise trading shocks in oil derivative markets is temporary. Our additional restrictions effectively put a bound on the contribution of speculation to short-term oil price volatility (lying between 3 and 22 percent). This estimated short-run impact is smaller than that of flow demand shocks but possibly larger than that of flow supply shocks.