Hedging and speculative pressures and the transition of the spot-futures relationship in energy and metal markets

Jin Suk Park, Y. Shi

Research output: Contribution to journalArticle

4 Citations (Scopus)
10 Downloads (Pure)

Abstract

This paper examines the impact of hedging and speculative pressures on the transition of the spot-futures relationship in metal and energy markets. We build a Markov regime switching (MRS) model where hedging and speculative pressures affect the transition probabilities between a stronger and weaker spot-futures relationship. It is found that hedging pressure increases the likelihood of transition, i.e. destabilises the existing spot-futures relationship, while speculative pressure reduces it, i.e. stabilises the relationship, in the copper, crude oil and natural gas markets, but this effect is relatively weak in the silver and heating oil markets. We also examine whether these findings generate practical benefits by testing the hedging effectiveness of the minimum variance hedge ratios (MVH) derived from the MRS models with hedging and speculative pressures. A relatively strong reduction of the portfolio variance, hedger's utility and value at risk (VaR) is observed in the energy markets.

Publisher Statement: NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, [60, (2016)] DOI: 10.1016/j.irfa.2016.12.001

© 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Original languageEnglish
Pages (from-to)176-191
JournalInternational Review of Financial Analysis
Volume54
Early online date23 Dec 2016
DOIs
Publication statusPublished - 1 Nov 2017

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, [60, (2016)] DOI: 10.1016/j.irfa.2016.12.001

© 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/

Keywords

  • Energy markets
  • Metal markets
  • Hedging pressure
  • Speculative pressure
  • Spot and futures relationship
  • Hedging performance

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  • Research Output

    • 4 Citations
    • 1 Conference proceeding

    Hedging and Speculative Pressures and the Transition of the Spot-Futures Relationship in Metal and Energy Markets - Conference Paper

    Park, J. S. & Shi, Y., 2015, Financial Engineering and Banking Society.

    Research output: Chapter in Book/Report/Conference proceedingConference proceeding

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