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Economic linkages across commodity futures : hedging and trading implications
journal contribution
posted on 2009-05-01, 00:00 authored by M ChngWe investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation reveals short-run cross-market interaction between NR and GA, and from NR to PA. Cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our findings are robust to lag-specification, volatility measure, and consistent with full BEKK-GARCH estimation results. Further analysis, which benchmarks against silver futures market, TOCOM index and TOPIX transportation index, confirms that our results are driven by a common industry exposure, and not a commodity market factor. A simple trading rule that incorporates short-run GA and long-run PA dynamics to predict NR return yields positive economic profit. Our study offers new insights into how commodity and equity markets relate at an industry level, and implications for multi-commodity hedging.
History
Journal
Journal of banking and financeVolume
33Issue
5Pagination
958 - 970Publisher
Elsevier B.V.Location
Amsterdam, The NetherlandsPublisher DOI
ISSN
0378-4266eISSN
1872-6372Language
engPublication classification
C1 Refereed article in a scholarly journalCopyright notice
2008, Elsevier B.V.Usage metrics
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