Economic linkages across commodity futures : hedging and trading implications

Chng, Michael 2009, Economic linkages across commodity futures : hedging and trading implications, Journal of banking and finance, vol. 33, no. 5, pp. 958-970.

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Title Economic linkages across commodity futures : hedging and trading implications
Author(s) Chng, Michael
Journal name Journal of banking and finance
Volume number 33
Issue number 5
Start page 958
End page 970
Total pages 13
Publisher Elsevier B.V.
Place of publication Amsterdam, The Netherlands
Publication date 2009-05
ISSN 0378-4266
1872-6372
Keyword(s) volatility
volume
cross-market
trading dynamics
VAR
commodity futures
Summary We 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.
Language eng
Field of Research 150201 Finance
Socio Economic Objective 900102 Investment Services (excl. Superannuation)
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2008, Elsevier B.V.
Persistent URL http://hdl.handle.net/10536/DRO/DU:30022989

Document type: Journal Article
Collections: Faculty of Business and Law
School of Accounting, Economics and Finance
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