Demystifying Commodity Futures in China

56 Pages Posted: 21 Feb 2018 Last revised: 2 Jun 2019

See all articles by John Hua Fan

John Hua Fan

Griffith University - Department of Accounting, Finance and Economics

Tingxi Zhang

Griffith University - Department of Accounting, Finance and Economics

Date Written: May 30, 2019

Abstract

This paper investigates the commodity futures risk premia in China. In the presence of excessive speculation and barriers-to-entry, the term structure and momentum premia remain persistent, whereas hedging pressure, skewness, volatility and liquidity premia are distorted by the time-varying margins and strict position limits. Furthermore, we show that open interest, currency and inflation premia are sensitive to the institutional settings. The observed premia cannot be attributed to aggregate market risks, none-tradable macroeconomic risks, sentiments, transactions costs or data-snooping. However, liquidity, anchoring, and regulation-induced “limits-to-arbitrage” provide a partial explanation. Finally, systematic strategies that exploit roll-yields, past returns and hedging pressure exhibit promising potential for portfolio diversification. Overall, the paper highlights the distinction between the US and Chinese commodity markets, sheds light on the effectiveness of risk-transfer in China, and poses challenges to existing theories on commodity risk premia.

Keywords: China, commodity futures, speculation, position limits, margins, price discovery, momentum, term structure, hedging pressure, liquidity, diversification

JEL Classification: G13, G14, G15, G41, N25, Q02

Suggested Citation

Fan, John Hua and Zhang, Tingxi, Demystifying Commodity Futures in China (May 30, 2019). Available at SSRN: https://ssrn.com/abstract=3124223 or http://dx.doi.org/10.2139/ssrn.3124223

John Hua Fan (Contact Author)

Griffith University - Department of Accounting, Finance and Economics ( email )

Brisbane, Queensland 4111
Australia
+61 (0)7 3735 3948 (Phone)
+61 (0)7 373 57760 (Fax)

Tingxi Zhang

Griffith University - Department of Accounting, Finance and Economics ( email )

Brisbane, Queensland 4111
Australia

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