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http://ssrn.com/abstract=2237392
 
 

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Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets


Vladimir Filimonov


Swiss Federal Institute of Technology Zurich (ETH Zurich)

David Bicchetti


United Nations - Conference on Trade and Development (UNCTAD)

Nicolas Maystre


UNCTAD - United Nations Conference on Trade and Development; Department of Economics - University of Geneva

Didier Sornette


Swiss Finance Institute; ETH Zurich

March 20, 2013


Abstract:     
We propose a novel index of short-term endogeneity (or reflexivity) derived by calibrating the Hawkes self-excited conditional Poisson model on empirical time series of trades. The Hawkes model accounts simultaneously for the co-existence and interplay between the exogenous impact of news and the endogenous mechanism by which past trading activity may influence future trading activity. Technically known in the mathematical literature on branching processes as the branching ratio, the reflexivity index is quantified for several commodity futures markets (corn, oil, soybean, sugar, and wheat) and also for a benchmark equity futures market (E-mini S&P 500). Specifically, the reflexivity index is the average ratio of the number of price moves that are due to endogenous interactions to the total number of all price changes, which also include exogenous events. We find an overall increase of the level of short-term endogeneity since the mid-2000s to October 2012, with a typical value nowadays around 0.6–0.7, implying that at least 60–70 per cent of commodity price changes are now due to self-generated activities rather than novel information. Our robustness tests show that the branching ratio provides a ‘pure’ measure of endogeneity that is independent of the rate of activity, order size, volume or volatility.

We complement our analysis by relating the endogeneity dynamics of these futures markets to their price dynamics, particularly around the commodity bubble that developed since 2006 and culminated in mid-2008. While our index does not have a long-term memory, interestingly, we find that it can still provide some interesting insights when the mechanisms working at longer time scales cascade down to shorter terms.

Number of Pages in PDF File: 56

Keywords: Commodities, endogeneity, reflexivity, branching processes, bubble, oil, regime shift, self-excitation

JEL Classification: G10, G12, G13, G14, O33

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Date posted: March 23, 2013  

Suggested Citation

Filimonov , Vladimir and Bicchetti, David and Maystre, Nicolas and Sornette, Didier, Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets (March 20, 2013). Available at SSRN: http://ssrn.com/abstract=2237392 or http://dx.doi.org/10.2139/ssrn.2237392

Contact Information

Vladimir Filimonov (Contact Author)
Swiss Federal Institute of Technology Zurich (ETH Zurich) ( email )
Scheuchzerstrasse 7, SEC F3
Zurich, CH-8092
Switzerland
David Bicchetti
United Nations - Conference on Trade and Development (UNCTAD) ( email )
Palais des Nations
Office E 10025
Geneva, 1211
Switzerland
Nicolas Maystre
UNCTAD - United Nations Conference on Trade and Development ( email )
Palais des Nations
Room: E 10013
Geneva, 1211
Switzerland
+41229171848 (Phone)
Department of Economics - University of Geneva ( email )
40, boulevard du Pont-d'Arve
Geneva 4, CH-1211
Switzerland
HOME PAGE: http://www.unige.ch/ses/dsec/staff/faculty/Maystre-Nicolas.html
Didier Sornette
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
ETH Zurich ( email )
Department of Management, Technology and Economics
Scheuchzerstrasse 7
8092 Zurich
Switzerland
41446328917 (Phone)
41446321914 (Fax)
HOME PAGE: http://www.er.ethz.ch/
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