EXTREMAL DEPENDENCIES ON COMMODITY FUTURES MARKETS

The aim of this study was to assess dependencies between extreme rates of return from commodity futures contracts on selected markets in the years 2000-2018. In periods of upheavals and turbulences, in markets for investors and portfolio management, it is crucial to estimate the probability of risk factors simultaneously taking extreme values. The analyses were conducted on dependencies between extreme rates of return (asymptotic dependencies) on markets of futures contracts for energy, metals and agricultural products in the years 2000-2018, applying the Copula-ARMA-GARCH models and tail dependence coefficients. Relatively strong and permanent asymptotic dependencies were found for pairs of futures contracts for crude oil and heating oil, while either no such dependencies were observed or only appeared during the subprime crisis and assumed very low values for other energy pairs of futures contracts and pairs of agricultural futures contracts, in which at least one of the contracts was concluded for soft commodities.

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Razvijeni oblik trgovine na robnim berzama - trziste robnih fjucersa -

Economic Annals ◽

10.2298/eka0358007e ◽

2003 ◽

Vol 44 (158) ◽

pp. 7-43 ◽

Cited By ~ 2

Author(s):

Milan Eremic

Keyword(s):

Complex System ◽

Futures Markets ◽

Commodity Markets ◽

Commodity Futures ◽

Futures Contracts ◽

Commodity Trade ◽

Commodity Exchange ◽

Commodity Futures Markets ◽

The World ◽

The Usa

At the very beginning of this paper, we stress the fact that capitalism, during a very long period of its emergence and development, was based on simple forms of commodity trading. It is true that capital left its mark on these simple forms. However, it did not change its simple character. Several centuries were to pass in for capital to build its own autochthonous forms of commodity exchange, the forms inherent in capitalism. The early forms of commodity futures, as the basic instrument of this developed commodity exchange, are thought to have been introduced on the Chicago Board of Trade - CBOT in 1985. The introduction of commodity futures contracts into commodity exchange enabled commodity markets to be divided into physical commodity markets and contract markets. This was the beginning of a complex system of commodity trade, the emergence of new economic entities in commodity markets and the development of a very complex system of trading, settlement and trade clearing through commodity futures contracts. The construction of this new system of commodity trade has lasted more than a century and during its gradual development a tremendous construct has been created, a market structure of extraordinary internal complexity and a solid logical design. The process of creating commodity futures market in the USA was outlined only in the early 1970s. We can say that it is an almost perfectly developed system, being today a dominant system in the world. Almost 100 percent of all commodity futures markets in the world are based on the commodity futures markets in the USA. The only exception is the London Metal Exchange, which is, although not being any less perfect, essentially different from the American exchanges.

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How well can investors diversify with commodities? Evidence from a flexible copula approach

Studies in Economics and Finance ◽

10.1108/sef-05-2018-0138 ◽

2019 ◽

Vol 36 (2) ◽

pp. 183-206 ◽

Cited By ~ 2

Author(s):

Panos Fousekis ◽

Vasilis Grigoriadis

Keyword(s):

Financial Crisis ◽

Portfolio Management ◽

Design Methodology ◽

Futures Markets ◽

Investment Strategy ◽

Sharp Contrast ◽

Commodity Futures ◽

Content Type ◽

Commodity Futures Markets ◽

Copula Approach

Purpose This paper aims to investigate empirically the linkages between stock and commodity futures markets. Design/methodology/approach It involves the application of a flexible copula approach to weekly total returns from the S&P 500 index and from three commodity sub-indices (agriculture, metals and energy) from 1995 to 2017. Findings Co-movement is by no means frequent and symmetric. It was predominantly zero before the last financial crisis, and since then, it is positive and asymmetric. The pattern of asymmetry is consistent with transmission of shocks under extreme negative shocks only. Recently, total returns of commodity futures are very poor. At the same time, commodity futures markets move in step (out of step) with stock markets when the latter plunge (rise), pointing to limited diversification benefits. These appear to justify the concerns of investors and researchers whether including commodities in a portfolio of assets is still a prudent investment strategy. Originality/value It is the only manuscript that combines a flexible copula approach and co-movement measurement along both the positive and negative diagonals. The findings are in sharp contrast with those reported by Delatte and Lopez (2013) and are very important for portfolio management.

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Heterogeneity of Cash Markets at Physical Delivery Points and the Hedging Effectiveness of Agricultural Commodity Futures in India – Lessons for Contract Optimization.

Applied Finance Letters ◽

10.24135/afl.v9i2.239 ◽

2020 ◽

Vol 9 (SI) ◽

pp. 79-89

Author(s):

Sanjay Mansabdar ◽

Hussain C Yaganti

Keyword(s):

Contract Design ◽

Commodity Futures ◽

Futures Contracts ◽

Agricultural Commodity ◽

Futures Contract ◽

Hedging Effectiveness ◽

Several Variables ◽

Agricultural Futures ◽

Delivery Options ◽

The Impact

Agricultural commodity futures in India are settled by physical delivery and the seller can choose the location of delivery from a list described in the contract specifications. Cash markets at these locations represent the deliverable basket for the futures contract and are the underlying assets for the delivery options granted to the seller by virtue of contract design. These cash markets are generally heterogenous. This paper studies the impact of heterogeneity of the underlying cash markets in different locations on the hedging effectiveness of the associated futures contract. The hedging effectiveness of cottonseed oilcake and soybean futures is regressed against several variables that represent heterogeneity of the underlying cash markets using ridge regression. We find that in general, the greater the heterogeneity, the poorer the hedging effectiveness of the contract. This paper is unique in that it provides a framework for guidance for contract designers at exchanges and regulators who will find this research useful in optimizing delivery specifications for agricultural futures contracts. This is especially important given the declining volumes in Indian agricultural commodity futures.

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Risk Transmission between Chinese and U.S. Agricultural Commodity Futures Markets—A CoVaR Approach

Sustainability ◽

10.3390/su11010239 ◽

2019 ◽

Vol 11 (1) ◽

pp. 239 ◽

Cited By ~ 2

Author(s):

Yangmin Ke ◽

Chongguang Li ◽

Andrew M. McKenzie ◽

Ping Liu

Keyword(s):

Value At Risk ◽

Futures Markets ◽

Price Discovery ◽

Commodity Futures ◽

Conditional Value At Risk ◽

Chinese Government ◽

Agricultural Commodity ◽

Futures Exchanges ◽

Commodity Futures Markets ◽

Agricultural Futures

Commodity futures markets play an important role, through risk management and price discovery, in helping firms make sustainable production and marketing decisions. An important related issue is how pricing signals between futures exchanges impact traders’ risk. We address this issue by shedding light on risk transmission between the most mature (U.S.) and the fastest growing (Chinese) commodity futures markets. Gaining greater insight of risk transmission between these key markets is vitally important to firms engaged in the efficient and sustainable trade of commodities needed to feed the world. We examine the risk transmission between Chinese and U.S. agricultural futures markets for soybean, corn, and sugar with a Copula based conditional value at risk (CoVaR) approach. We find significant upside, and to a lesser extent downside risk transmission, between Chinese and U.S. markets. We confirm the dominant pricing role of U.S. agricultural futures markets while acknowledging the increasing price discovery role performed by Chinese markets. Our results highlight that soybean markets exhibit greater risk transmission than sugar and corn markets. We argue that our findings may be explained by Chinese government policy intervention, and by the large role played by U.S. firms in the underlying cash commodity markets–both in terms of production and trade.

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Volatility Modeling and Dependence Structure of ESG and Conventional Investments

Risks ◽

10.3390/risks10010020 ◽

2022 ◽

Vol 10 (1) ◽

pp. 20

Author(s):

Joanna Górka ◽

Katarzyna Kuziak

Keyword(s):

Extreme Values ◽

Tail Dependence ◽

Dependence Structure ◽

Rates Of Return ◽

Short Time Series ◽

Volatility Models ◽

Financial Investments ◽

European Banking ◽

Short Time ◽

Data Requirements

The question of whether environmental, social, and governance investments outperform or underperform other conventional financial investments has been debated in the literature. In this study, we compare the volatility of rates of return of selected ESG indices and conventional ones and investigate dependence between them. Analysis of tail dependence is important to evaluate the diversification benefits between conventional investments and ESG investments, which is necessary in constructing optimal portfolios. It allows investors to diversify the risk of the portfolio and positively impact the environment by investing in environmentally friendly companies. Examples of institutions that are paying attention to ESG issues are banks, which are increasingly including products that support sustainability goals in their offers. This analysis could be also important for policymakers. The European Banking Authority (EBA) has admitted that ESG factors can contribute to risk. Therefore, it is important to model and quantify it. The conditional volatility models from the GARCH family and tail-dependence coefficients from the copula-based approach are applied. The analysis period covered 2007 until 2019. The period of the COVID-19 pandemic has not been analyzed due to the relatively short time series regarding data requirements from models’ perspective. Results of the research confirm the higher dependence of extreme values in the crisis period (e.g., tail-dependence values in 2009–2014 range from 0.4820/0.4933 to 0.7039/0.6083, and from 0.5002/0.5369 to 0.7296/0.6623), and low dependence of extreme values in stabilization periods (e.g., tail-dependence values in 2017–2019 range from 0.1650 until 0.6283/0.4832, and from 0.1357 until 0.6586/0.5002). Diversification benefits vary in time, and there is a need to separately analyze crisis and stabilization periods.

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EFFECTIVE CROSS HEDGING: EVIDENCE FROM PHYSICAL CRUDE PALM OIL AND ITS INTER-RELATED AGRICULTURAL FUTURES CONTRACTS

Management and Accounting Review (MAR) ◽

10.24191/mar.v17i2.812 ◽

2018 ◽

Vol 17 (2) ◽

pp. 123

Author(s):

Noryati Ahmad ◽

Ahmad Danial Zainudin ◽

Fahmi Abdul Rahim ◽

Catherine S F Ho

Keyword(s):

Palm Oil ◽

Futures Contracts ◽

Crude Palm Oil ◽

Oil Futures ◽

Futures Contract ◽

Agricultural Futures ◽

Cross Hedging ◽

Optimal Hedge ◽

Excessive Speculation ◽

Chicago Board Of Trade

Since its establishment, Crude Palm Oil futures contract (FCPO) has been used to directly hedge its physical crude palm oil (CPO). However, due to the excessive speculation activities on crude palm oil futures market, it has been said to be no longer an effective hedging tool to mitigate the price risk of its underlying physical market. This triggers the need for market players to find possible alternatives to ensure that the hedging role can be executed effectively. Thus this investigation attempts to examine whether other inter-related grains and oil seed futures contracts could serve as effective cross-hedging mechanisms for the CPO. Weekly data of inter-related futures contracts from Chicago Board of Trade (CBOT) and Dalian Commodity Exchange (DCE) are employed to cross hedge the physical crude palm oil prices. The study starts from 2006 until 2016. Empirical results indicate that FCPO is still the best futures contract for hedging purposes while Chicago Soybean (CBOTBO) provides second best alternative if cross-hedging is considered. Keywords: Crude palm oil, Crude palm oil futures, Cross Hedging, Optimal Hedge Ratio, Effective Hedging

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