A Dynamic Analysis of the Distribution of Commodity Futures and Spot Prices (joint work with Jean Paul Chavas)
Presented by:
Jian Li, Visting Professor
Department of Agricultural and Applied Economics
University of Wisconsin-Madison (Home Institution: Huazhong Agricultural University)
Wednesday, November 18, 2020
12:00 pm-1:30 pm
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This paper studies the evolving nature of commodity prices, with a focus on the dynamics of the joint distribution of futures price and spot price. It proposes a flexible two-step method to evaluate the joint movement of futures price and spot price: first, estimate a quantile vector auto-regression (QVAR) model of the marginal distribution of each price; second, estimate a copula of their joint distribution. The approach is applied to the US soybean market over the last four decades. We study the evolving nature of the marginal and joint price distributions, including dynamic own and cross-price effects. We also investigate the presence of nonlinear dynamics and the effects of maturity of the futures contract. The application to the US soybean market illustrates the usefulness of the approach. Some of our key results include: a/ we find evidence of local dynamic instability in the upper-tail of the price distributions; b/ we estimate nonlinear co-integration relationships between futures price and spot price and find that they vary with market conditions; c/ we report quantile-specific impulse response functions documenting the importance of the futures market in soybean price discovery; d/ we evaluate the patterns exhibited by the basis and examine the convergence properties of the futures and spot price.
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