Price Volatility, the Maturity Effect, and Global Oil Prices: Evidence from Chinese Commodity Futures Markets
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Price Volatility, the Maturity Effect, and Global Oil Prices: Evidence from Chinese Commodity Futures Markets Jing Ao 1 & Jihui Chen 2 # Academy of Economics and Finance 2020
Abstract We study the maturity effect using 41 major agricultural, industrial, and metal commodities traded in three Chinese futures exchanges between 2006 and 2015. After controlling for seasonality, year and product fixed effects, we find supportive evidence of the maturity effect in futures contracts for several agricultural products, but not for metal nor industrial products. To the best of our knowledge, this is the first comprehensive study to document the maturity effect of Chinese futures contracts. Keywords Futures Markets . Price Volatility . Chinese Commodity Futures JEL Classification G13 . G15 . Q02
1 Introduction There is an extensive literature on price volatility in futures markets with alternative explanations. Early research proposes the inventory theory (Working 1942, 1948, 1949), and some studies consider a more general model where equilibrium prices in the spot and futures markets are simultaneously determined (Stein 1979; Anderson and Danthine 1983). The seminal work by Samuelson (1965) argues that futures contracts long before maturity carry greater uncertainty and therefore react weakly to given information, while the opposite is true for futures contracts close to maturity, or “the maturity effect.” However, empirical studies on the maturity effect is inconclusive in various commodity and financial futures markets. While studies on agricultural products generally find supportive evidence of the maturity effect (e.g., Koekebakker and Lien 2004; Smith 2005; Frank and Garcia 2011), those on We thank Hassan Mohammadi and session participants at the 2017 Southern Economic Association Annual Meetings for helpful comments. The usual caveat applies.
* Jihui Chen [email protected] Extended author information available on the last page of the article
Journal of Economics and Finance
energy and financial products, as well as metals, often do not (e.g., Fama and French 1988; Bessembinder et al. 1996; Swift 2001; Mu 2007).1 From early 2000s, the international commodity markets have experienced significant price fluctuations, due to various demand and supply shocks, as well as changes in business, political, and even environmental cycles (Pop et al. 2013). It is thus important to understand price volatility of commodities in the ever-interconnected global economies. As a dominant player, China’s demand for commodities – agriculture, metals, and energy, has had profound implications for the commodity markets worldwide in recent decades. To date, little evidence has been documented on the maturity effect in Chinese commodity futures markets. This study aims to fill the gap. To address the research question, we assemble a sample consisting of 41 agricultural, industrial, and metal commodities from three major Chinese exchanges, namely, Zhengzhou Commodity Exchange (CZCE), Dalian Commodity Exchange (DCE), and Shanghai Futures Excha
