A Dynamic Model of Hedging and Speculation in the Commodity Futures Markets

Posted: 7 Mar 2016

See all articles by Giulio Cifarelli

Giulio Cifarelli

DISEI University of Florence

Giovanna Paladino

IntesaSanpaolo; LUISS Economics Department

Date Written: September 20, 2015


Over the 1990–2010 time period, a dynamic interaction between spot and futures returns in five commodity markets (copper, cotton, oil, silver, and soybeans) is empirically validated. An error correction relationship for the cash returns and a non-linear parameterization of the corresponding futures returns are combined with a bivariate CCC-GARCH representation of the conditional variances. Hedgers and speculators are contemporaneously at work in the futures markets, the role of the latter being far from negligible. In order to capture the consequences of the growing turbulence of these markets, a two-state regime-switching model for futures returns is developed. In this way financial traders' time-varying risk appetites are allowed to interact with hedgers' demand in determining both future and spot prices.

Keywords: Commodity spot and futures markets, Dynamic hedging, Speculation, non-linear GARCH, Markov regime switching

JEL Classification: G13, G15, Q47

Suggested Citation

Cifarelli, Giulio and Paladino, Giovanna, A Dynamic Model of Hedging and Speculation in the Commodity Futures Markets (September 20, 2015). Journal of Financial Markets, Vol. 25, 2015, pp1-15 doi:10.1016/j.finmar.2015.07.002. Available at SSRN: https://ssrn.com/abstract=2742617

Giulio Cifarelli

DISEI University of Florence ( email )

via delle Pandette 9
Florence 50127

Giovanna Paladino (Contact Author)

IntesaSanpaolo ( email )

Piazza San Carlo
Torino, 10121

LUISS Economics Department ( email )

Viale di Villa Massimo, 57
Rome, 00161

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