Permanent and Transitory Price Shocks in Commodity Futures Markets and Their Relation to Storage and Speculation

40 Pages Posted: 5 Mar 2013

See all articles by Marco Haase

Marco Haase

University of Basel - Center for Economic Science (WWZ) - Department of Finance

Yvonne Seiler

Lucerne University of Applied Sciences and Arts, School of Business, Institute of Financial Services Zug (IFZ)

Heinz Zimmermann

University of Basel - Center for Economic Science (WWZ) - Department of Finance

Date Written: March 3, 2013

Abstract

This paper takes an innovative look at the relationship between the pricing of commodity futures contracts and its relation to storage and speculation. Fifteen commodities are analyzed over the time period from 1990 to 2010. Contrary to other studies, we analyze temporary and permanent futures price innovations in a cointegrated system of pairwise short- and long-dated contracts. The innovations are used to perform Granger causality tests with respect to the level of net speculation and changes in inventories. Our findings can be summarized as follows: first, where cointegration is observed, the permanent shocks of the system are determined by the long-dated contract, while the adjustment towards equilibrium is restored by the short-dated contract. Second, we do no find evidence that speculation has statistically significant effects on permanent or transitory price shocks. Under the assumption that speculation occurs mainly in short-dated contracts, the finding is inconsistent with the common presumption that speculation has permanent effects on the price formation process. Third, temporary futures price distortions are largely absorbed by adjustments in inventories, while permanent price shocks affect inventories only in a few cases.

Keywords: Commodity futures prices, cointegration, temporary and permanent price shocks, speculation and storage

JEL Classification: C22, G13, Q02

Suggested Citation

Haase, Marco and Seiler, Yvonne and Zimmermann, Heinz, Permanent and Transitory Price Shocks in Commodity Futures Markets and Their Relation to Storage and Speculation (March 3, 2013). Available at SSRN: https://ssrn.com/abstract=2227757 or http://dx.doi.org/10.2139/ssrn.2227757

Marco Haase

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian Weg 6
Basel, CH-4002
Switzerland

Yvonne Seiler

Lucerne University of Applied Sciences and Arts, School of Business, Institute of Financial Services Zug (IFZ) ( email )

Grafenauweg 10
Zug, CH-6304
Switzerland

Heinz Zimmermann (Contact Author)

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian Weg 6
Basel, 4002
Switzerland
+41 61 267 33 16 (Phone)
+41 61 267 08 98 (Fax)

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