The Untold Story of Commodity Futures in China
Journal of Futures Markets, Forthcoming
69 Pages Posted: 21 Feb 2018 Last revised: 26 Jan 2020
Date Written: December 11, 2019
We investigate the behavior of commodity futures risk premia in China. In the presence of retail-dominance and barriers-to-entry, the term structure and momentum premia remain persistent, whereas hedging pressure, skewness, volatility and liquidity premia are distorted by time-varying margins and strict position limits. Furthermore, open interest, currency and inflation premia are sensitive to institutional settings. The observed premia cannot be attributed to common risks, sentiment, transactions costs or data-snooping, but are related to liquidity, anchoring, and regulation-induced limits-to-arbitrage. We highlight the distinctive features of Chinese futures markets and assess the challenges posed to theories of commodity risk premia.
Keywords: China; Commodity futures; Position limits; Margins; Price discovery; Momentum; Term structure; Hedging pressure; Liquidity; Diversification
JEL Classification: G13, G14, G15, G41, N25, Q02
Suggested Citation: Suggested Citation