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Journal of Economics and Finance

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04-01-2020

Price Volatility, the Maturity Effect, and Global Oil Prices: Evidence from Chinese Commodity Futures Markets

Authors: Jing Ao, Jihui Chen

Published in: Journal of Economics and Finance | Issue 4/2020

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Abstract

We study the maturity effect using 41 major agricultural, industrial, and metal commodities traded in three Chinese futures exchanges between 2006 and 2015. After controlling for seasonality, year and product fixed effects, we find supportive evidence of the maturity effect in futures contracts for several agricultural products, but not for metal nor industrial products. To the best of our knowledge, this is the first comprehensive study to document the maturity effect of Chinese futures contracts.

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Previous studies often focus on the linkage between Chinese commodity futures and international financial markets, in terms of information transmission and market efficiency (Lee et al. 2009; Fung et al. 2013).

“What to expect from China's futures market opening up” by Sharnie Wong, Bloomberg Intelligence, July 04, 2018 (https://www.bloomberg.com/professional/blog/expect-chinas-futures-market-opening/).

Source: “Chinese traders race to become a growing force in global copper trading markets,” by Evelyn Cheng, November 16, 2017, CNBC (https://www.cnbc.com/2017/11/16/chinese-traders-a-growing-force-in-global-copper-trading-markets.html).

Source: “China is working to change global commodity trading- to its own benefits.” by Huileng Tan, June 8, 2018, CNBC (https://www.cnbc.com/2018/06/06/china-is-working-to-change-global-commodities-trading.html).

See Appendix A.1 for detailed information on commodities traded on each exchange.

As the first step towards internationalization of its financial markets, China only recently granted international participants market access to crude oil futures (SHFE) and iron ore futures (DCE) in 2018 (Source: Source: “China is working to change global commodity trading- to its own benefits.” by Huileng Tan, June 8, 2018, CNBC (https://www.cnbc.com/2018/06/06/china-is-working-to-change-global-commodities-trading.html).

For instance, the price limits in our sample period (Jan. 2006 to Dec. 2005) do not change.

For example, the CME Group rules that daily price limits for some agricultural futures are reset every six month, such as corn futures, soybean futures, and wheat futures.

Source: https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/4/4.pdf

Source: https://www.investopedia.com/terms/p/positionlimit.asp.

Source: https://www.cmegroup.com/content/dam/cmegroup/notices/ser/2018/10/SER-8270.pdfs.

Source: https://www.cmegroup.com/market-regulation/position-limits.html.

Source: https://www.cmegroup.com/clearing/operations-and-deliveries/deliveries.html.

Source: https://www.cmegroup.com/content/dam/cmegroup/rulebook/CBOT/I/7/7.pdf

For additional information, visit: http://www.shfe.com.cn/statements/dataview.html?paramid=kx on the SHFE, http://www.czce.com.cn/portal/jysj/qhjysj/mrhq/A09112001index_1.htm on the CZCE, and http://www.dce.com.cn/dalianshangpin/xqsj/tjsj26/rtj/rxq/index.html on the DCE, respectively.

Except for quarterly GDP data, all other indices are reported monthly. Source: National Bureau of Statistics of China (http://data.stats.gov.cn/english/).

Source: https://cn.investing.com/indices/shanghai-composite-historical-data

On non-trading days when the information on daily closing prices is unavailable, we would still have daily settlement prices, which are the same as the previous business day. Our estimation results are also robust to the dispersion measures based on daily settlement prices; these results are available upon request from the authors.

Recall from Section 3, all Chinese commodity futures contracts are set to be delivered within 12 months, or TTM_{i, k − t} ≤ 12.

Source: The U.S Energy Information Administration (EIA).

Depending on the approved timing of listing by the China Securities Regulatory Commission (CSRC), some products may have a shorter trading period than others in the sample.

Source: “Global groups pay a heavy price for China’s slowdown,” by Sarah Gordon, January 19, 2016, Financial Times (https://www.ft.com/content/75f1f276-bdda-11e5-846f-79b0e3d20eaf).

Cavalcanti et al. (2015) apply the GMM estimation method to take into consideration possible endogeneity in the regression model when studying the impact of commodity price volatility on economic growth.

Note that we are rather conservative when drawing these conclusions, as we compare the results from all 12 model specifications.

Refer to Chan et al. (2004) for a discussion on the effects of China’s regulations on the futures markets.

Source: “Dalian exchange going global,” by Xiaomin Zhang, February 28, 2017, China Daily (http://www.chinadaily.com.cn/business/2017-02/28/content_28371376.htm).

The estimates for lnbrent appear to have mixed signs in Table 4, but it is negative and statistically significant in Model (4).

Source: “Regulator says to open China’s futures market further – China Securities Journal,” by Reuters staff, September 27, 2017, Reuters (https://www.reuters.com/article/china-markets-regulator/regulator-says-to-open-chinas-futures-market-further-china-securities-journal-idUSL4N1M90NU).

Source: “China’s long-heralded crude oil futures contract to start trading March 26,” by Daniel Ren, South China Morning Post (http://www.scmp.com/business/commodities/article/2132765/chinas-long-heralded-crude-oil-futures-contract-start-trading).

Source: “China to open up access to yuan-dominated commodity futures contracts as trade war escalates,” by Daniel Ren, South China Morning Post (https://www.scmp.com/business/china-business/article/3012161/china-open-access-yuan-denominated-commodity-futures).

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Title: Price Volatility, the Maturity Effect, and Global Oil Prices: Evidence from Chinese Commodity Futures Markets
Authors: Jing Ao
Jihui Chen
Publication date: 04-01-2020
Publisher: Springer US
Published in: Journal of Economics and Finance / Issue 4/2020
Print ISSN: 1055-0925
Electronic ISSN: 1938-9744
DOI: https://doi.org/10.1007/s12197-019-09497-1

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