Top

Hint

Swipe to navigate through the articles of this issue

Published in:

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

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.

next article Financial market risk and macroeconomic stability variables: dynamic interactions and feedback effects

Available only for authorised users

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).

Ahmadi M, Behmiri NB, Manera M (2016) How is volatility in commodity markets linked to oil price shocks? Energy Econ 59:11–23

Akin RM (2003) Maturity effects in futures markets: evidence from eleven financial futures markets. UC Santa Cruz Economics Working Paper, (03–6)

Akram QF (2009) Commodity prices, interest rates and the dollar. Energy Econ 31(6):838–851

Anderson RW (1985) Some determinants of the volatility of futures prices. J Futur Mark 5(3):331–348

Anderson RW, Danthine JP (1983) The time pattern of hedging and the volatility of futures prices. Rev Econ Stud 50(2):249–266

Baum CF, Schaffer ME, Stillman S (2007) Enhanced routines for instrumental variables/generalized method of moments estimation and testing. Stata J 7(4):465–506

Bessembinder H, Seguin PJ (1993) Price volatility, trading volume, and market depth: Evidence from futures markets. J Financ Quant Anal 28(1):21–39

Bessembinder H, Coughenour JF, Seguin PJ, Smoller MM (1996) Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis. J Deriv 4:45–58

Cavalcanti TVDV, Mohaddes K, Raissi M (2015) Commodity price volatility and the sources of growth. J Appl Economet 30(6):857–873

Chan KC, Fung H, Leung WK (2004) Daily volatility behavior in Chinese futures markets. J Int Financ Mark Inst Money 24:491–505

Chatrath A, Adrangi B, Dhanda KK (2002) Are commodity prices chaotic? Agric Econ 27(2):123–137

Chen J (2015) Consumer Search, Market Characteristics, and Price Dispersion: New Evidence from the Retail Markets for Prescription Drugs. Manag Decis Econ 36(8):545–558

Chevallier J, Sévi B (2012) On the volatility–volume relationship in energy futures markets using intraday data. Energy Econ 34(6):1896–1909

Coates B, Luu N (2012) China's emergence in global commodity markets. Econ Round-up 1:1

D’Ecclesia RL, Magrini E, Montalbano P, Triulzi U (2014) Understanding recent oil price dynamics: a novel empirical approach. Energy Econ 46:S11–S17

Daal E, Farhat J, Wei PP (2006) Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts. Rev Financ Econ 15(2):113–128

Doran JS, Ronn EI (2008) Computing the market price of volatility risk in the energy commodity markets. J Bank Financ 32(12):2541–2552

Du X, Hayes DJ (2011) The impact of ethanol production on US and regional gasoline markets: an update to May 2009 (No. 1040-2016-85171).

Duong HN, Kalev PS (2008) The Samuelson hypothesis in futures markets: An analysis using intraday data. J Bank Financ 32(4):489–500

Fama EF, French KR (1988) Business cycles and the behavior of metals prices. J Financ 43(5):1075–1093

Fan JH, Mo D, Zhang T (2018) Commodity futures speculation in China. Working paper. Griffith University.

Frank J, Garcia P (2011) Bid-ask spreads, volume, and volatility: Evidence from livestock markets. Am J Agric Econ 93(1):209–225

Fung HG, Tse Y, Yau J, Zhao L (2013) A leader of the world commodity futures markets in the making? The case of China's commodity futures. Int Rev Financ Anal 27:103–114

Galloway TM, Kolb RW (1996) Futures prices and the maturity effect. J Fut Mark 16(7):809–828

Grammatikos T, Saunders A (1986) Futures price variability: A test of maturity and volume effects. J Bus 59(2):319–330

Issler JV, Rodrigues C, Burjack R (2014) Using common features to understand the behavior of metal-commodity prices and forecast them at different horizons. J Int Money Financ 42:310–335

Kadioglu E, Kilic S, Öcal N (2016) Determinants of Price Volatility of Futures Contracts: Evidence from an Emerging Market. J Appl Finance Bank 6(2):103–115

Karali B, Thurman WN (2010) Components of grain futures price volatility. Agric Resour Econ Rev 35(2):167–182

Khoury N, Yourougou P (1993) Determinants of agricultural futures price volatilities: Evidence from Winnipeg Commodity Exchange. J Fut Mark 13(4):345–356

Koekebakker S, Lien G (2004) Volatility and price jumps in agricultural futures prices—evidence from wheat options. Am J Agric Econ 86(4):1018–1031

Lee KC, Fung HG, Liao TL (2009) Day-of-the-week effects in the US and Chinese commodity futures markets. Rev Futur Mark 18(1):27–53

Malliaris AG, Urrutia JL (1991) The impact of the lengths of estimation periods and hedging horizons on the effectiveness of a hedge: Evidence from foreign currency futures. J Fut Mark 11(3):271–289

Martell TF, Wolf AS (1987) Determinants of trading volume in futures markets. J Futur Mark (1986-1998) 7(3):233

Milonas NT (1986) Price variability and the maturity effect in futures markets. J Futur Mark 6(3):443–460

Mu X (2007) Weather, storage and natural gas price dynamics: fundamentals and volatility. Energy Econ 29:46–63

Pindyck RS (2001) The dynamics of commodity spot and futures markets: a primer. Energy J 22(3):1–29

Pop LN, Rovinaru F, Rovinaru M (2013) Commodity price volatility during and after the economic crisis–Implications for Romania. Southeast Eur J Econ Bus 8(1):45–52

Samuelson PA (1965) Proof that properly anticipated prices fluctuate randomly. Ind Manage Rev (pre-1986) 6(2):41

Serletis A (1992) Maturity effects in energy futures. Energy Econ 14(2):150–157

Smith A (2005) Partially overlapping time series: a new model for volatility dynamics in commodity futures. J Appl Economet 20:405–422

Stein JL (1979) Spot, forward and futures. Res Finance 1:225–310

Swift R (2001) Exchange rates and commodity prices: the case of Australian metal exports. Appl Econ 33(6):745–753

Tothova M (2011) Main challenges of price volatility in agricultural commodity markets. In: Methods to analyse agricultural commodity price volatility. Springer, New York, pp 13–29

Verma A, Kumar CVRS (2010) An examination of the maturity effect in the Indian commodities futures market. Agric Econ Res Rev 23(2)

Wang Q, Wu N (2012) Menu-driven X-12-ARIMA seasonal adjustment in Stata. Stata J 12(2):214

Wang GH, Yau J (2000) Trading volume, bid-ask spread, and price volatility in futures markets. J Futur Mark 20(10):943–970

Working H (1942) Quotations on commodity futures as price forecasts. Econometrica 10(1):39–52

Working H (1948) Theory of the inverse carrying charge in futures markets. J Farm Econ 30(1):1–28

Working H (1949) The theory of price of storage. Am Econ Rev 39(6):1254–1262

Zhang C, Qu X (2015) The effect of global oil price shocks on China’s agricultural commodities. Energy Econ 51:354–364

Zhao L (2015) The development and challenges of china’s futures markets. Chin Econ 48(4):279–296

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

Springer Professional

Hint

Swipe to navigate through the articles of this issue

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

Abstract

Premium Partner

Springer Professional

Hint

Swipe to navigate through the articles of this issue

Abstract

Please log in to get access to this content

Other articles of this Issue 4/2020

Manufacturing as a Growth Escalator in Low and Middle Income Countries

The U.S. term structure and return volatility in emerging stock markets

The effect of oil price shocks on economic activity: a local projections approach

Does what happen in Vegas stay in Vegas? Football gambling and stock market activity

Gold market price spillover between COMEX, LBMA and SGE

Job Movement and Real Wage Flexibility in Eastern and Western Parts of Germany

Premium Partner