Are Futures Prices Influenced by Spot;Prices or Vice-versa? An Analysis of Crude;Oil, Natural Gas and Gold Markets (original) (raw)
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Working Paper
This research is focused on the “reverse” relationships between spot and futures markets with particular attention given to the interrelationships between markets for food commodities and energy. The study is interesting for reasons of economics and political science particularly as concerns “oil for food” agreements. Acknowledging the many empirical tests of efficient markets, this study lends insight into the empirical validity of reverse regressions hypothesizing that spot prices today contain information useful for predicting forward rates in the future. This paper analyzes the possible relationship between selected futures prices and spot oil prices considering the importance of the effects of temporal aggregation as well as alternative model specifications and assumptions on the distributions of residuals. In addition to the assumption of normality, the paper considers use of a fat-tailed distribution (multivariate t-distribution) to examine the robustness of results that are based on the normality assumption. Finally, models are compared in terms of ex post predictive validity.
Energy Economics, 2018
Unbiasedness and informational efficiency of futures markets under different market conditions is a claim that still remains unsettled in the theory of non-arbitrage and asset pricing and in empirics as well. This study investigates this claim using a novel causality-inquantile model of Balcilar et al. (2016) for two energy commodities, crude oil and natural gas, and two precious metals, gold and silver. The model estimates causalities-in-mean andvariance between spot and futures market in a time varying context conditioning on the states of the markets represented by the quantiles of the conditional distribution of the dependent variable. The causality in return is asymmetric and unidirectional from futures to spot market for all commodities. That means the predictability of the futures market, due to its informational efficiency, is strong in the normal market and declines when the spot market enters into extreme bearish and bullish conditions. The causality-in-variance is bi-directional in the normal to bull markets except for natural gas where it is unidirectional from futures to spot only. It is a confirmation of the risk management and price discovery role of futures market. Lack of causality in the bear market entails some kind of disconnectedness between the spot and futures markets in a bad market where intervention is called for from the exchange and regulators to restore stability in the spot and futures market dynamics. Although economic uncertainty is found to have no impact on the causality-in-mean except gold; however, the causality-in-variance is influenced in the case of gold and crude. This is a kind of reaffirmation of the fact that under economic uncertainty, futures contracts are used for hedging under different market conditions. However, the causality between commodity spot and futures are resilient to exchange rate.
Energy Economics, 2008
The present study investigates the linear and nonlinear causal linkages between daily spot and futures prices for maturities of one, two, three and four months of West Texas Intermediate (WTI) crude oil. The data cover two periods with the latter being significantly more turbulent. Apart from the conventional linear Granger test we apply a new nonparametric test for nonlinear causality by Diks and Panchenko after controlling for cointegration. In addition to the traditional pairwise analysis, we test for causality while correcting for the effects of the other variables. To check if any of the observed causality is strictly nonlinear in nature, we also examine the nonlinear causal relationships of VECM filtered residuals. Finally, we investigate the hypothesis of nonlinear non-causality after controlling for conditional heteroskedasticity in the data using a GARCH-BEKK model. Whilst the linear causal relationships disappear after VECM cointegration filtering, nonlinear causal linkages in some cases persist even after GARCH filtering in both periods. This indicates that spot and futures returns may exhibit asymmetries and statistically significant higherorder moments. Moreover, the results imply that if nonlinear effects are accounted for, neither market leads or lags the other consistently, videlicet the pattern of leads and lags changes over time.
Determination of Causality in Prices of Crude Oil
International Journal of Energy Economics and Policy
Price determination through demand and supply forces is the most efficient pricing mechanism. But, these forces should be real rather than artificial. Speculative trade creates artificial market forces, which bounds to disturb real economy. It is argued that the demand and supply forces are primarily driven by speculation rather than fundamentals in the presence of commodity derivatives. The aim of this study is to empirically test this argument through causality analyses. Crude oil and USA has been selected as a typical case. Daily spot prices of west texas intermediate crude oil and future prices from New York Mercantile Exchange from January 2 nd , 1986 to March 6 th , 2017 has been analyzed. Granger causality test and vector error correction model are applied to find out the causal relationship between spot and futures prices. Results show that causality runs from runs from crude oil futures to spot prices, crude oil is just one of the numerous commodities, which are being speculatively traded through derivatives.
Determination of Causality in the Prices of Crude Oil
International Journal of Energy Economics and Policy, 2019
Price determination through demand and supply forces is the most efficient pricing mechanism. But, these forces should be real rather than artificial. Speculative trade creates artificial market forces, which bounds to disturb real economy. It is argued that the demand and supply forces are primarily driven by speculation rather than fundamentals in the presence of commodity derivatives. The aim of this study is to empirically test this argument through causality analyses. Crude oil and USA has been selected as a typical case. Daily spot prices of west texas intermediate crude oil and future prices from New York Mercantile Exchange from January 2 nd , 1986 to March 6 th , 2017 has been analyzed. Granger causality test and vector error correction model are applied to find out the causal relationship between spot and futures prices. Results show that causality runs from runs from crude oil futures to spot prices, crude oil is just one of the numerous commodities, which are being speculatively traded through derivatives.
Relationship Between Spot Prices and Futures Prices: Evidence From Karachi Stock Exchange
Journal of Business & Tourism
This study investigates the relationship between futures prices and their underlying spot prices of the stocks trading on Pakistan stock market. Data on the monthly closing prices of future contracts and their underlying stocks of 30 companies for the period January 2004 to June 2014 have been taken for analysis. Descriptive statistics, Augmented Dicky Fuller test for unit root testing, Johnson Co-integration test, Granger causality test and Vector Error Correction Model are used. The results confirms significant long term relationship between futures prices and the associated Spot prices in case of 26 companies. The report of Granger causality test indicates that a Bi-directional causality lack to exist in case of each security, VECM shows that Spot prices for current month are effected by previous month prices in case of 7 companies, while futures prices of current month are affected by previous month prices in case of 4 companies. VECM illustrates that the volatility shocks in sp...
Efficiency of commodity futures: A vector autoregression analysis
Journal of Futures Markets, 1985
he purpose of this article is to reexamine the efficient market hypothesis T (E M H) as applied to agricultural commodity futures markets. This reexamination appears to be warranted for two reasons. First, the conclusion drawn by previous researchers in studying the efficient market hypothesis for a variety of agricultural commodity futures markets are not uniform. Specifically, these studies do not provide sufficient evidence to support or reject (1) the efficiency and unbiasedness properties of futures prices as predictors of future spot prices, and (2) the rationality of expectations of futures market participants. Second, these studies have all employed single-equation techniques to test the EMH. However, Hanson and Hodrick (1980), Hakkio (1981), and Frenkel(1981), in their studies of foreign exchange markets, have demonstrated the inefficiency of single-equation methods to test accurately the EMH. Hence, researchers modeling futures markets and/or futures market participant behavior in structural models of the agricultural sector or crop-specific subsectors may have been misled by the findings in these past studies. In this article we address these two unsettled issues by testing the EMH within *We gratefully acknowledge the assistance of Stephen E. Ross in undertaking the computer processing of the 'The efficient market hypothesis is the proposition that the futures price at time t for delivery in time L + k 'For example, see, Stevenson and Bear (1970), Tomek and Gray (1970), Kofi (1973), Leuthold (1974), Garcia 3Past researchers have assumed the rationality of traders' expectations, but have not explicitly tested the REH. data and development of the modified FIML program used in this article. is an unbiased and efficient predictor of the spot price at time t + k. and Martin (1981).
The role of trader positions in spot and futures prices for WTI
2013
We extend the analysis of causal relations between trader positions and oil prices and the process of price discovery by estimating a cointegrating vector autoregression (CVAR) model that expands the cash-and-carry relation between spot and futures prices to quantify long-and short-run relations among oil prices, trader positions, interest rates, and oil inventories. Results indicate that oil inventories and trader positions are needed to generate cointegration between spot and futures prices. The presence of trader positions and oil inventories suggest that both play a role in price discovery. Furthermore, the cointegrating relation for price loads into the equation for both oil prices and trader positions. This suggests a bi-directional simultaneous adjustment process between oil prices and trader positions. This expands the unidirectional causal relation from oil prices to trader positions that is generated by previous studies. Additional results suggest that price discovery occurs in the market for heavily traded near-month futures contracts, but discovery for thin far-month futures markets occurs in the spot market. Together, these results suggest mechanisms by which speculation could affect oil prices but the results presented here are moot regarding their effects.
The Inter-Temporal Causal Nexus between Indian Commodity Futures and Spot Prices: A Wavelet Analysis
Theoretical Economics Letters, 2015
This study examines the inter-temporal causal nexus between Indian commodity futures and spot prices by using wavelet analysis. Wavelet analysis offers an effective alternative tool to examine the inter-temporal causal relationship in time as well as frequency domains, providing a deeper understanding of direction, strength and extent of such causal relationship; whereas traditional econometric causality analysis tools focus only on the time domain. The empirical results of wavelet analysis suggest that the Indian commodity futures market has a powerful price discovery function in all the selected commodities, which in turn indicates the efficiency of the Indian commodity futures market.