Abstract
The study sought to contribute to the extant literature on the interconnectedness between commodity spot prices and futures prices by covering daily data from 2001-2019. Employing the OLS and the QR, different dynamics of the relationship between commodity spot and futures prices emerged from the study. For oil and gold prices, OLS estimator revealed that neither spot nor futures prices of the commodities had a significant effect on the other. Quantile regression estimators however suggested otherwise. For oil prices, futures prices were found to have a significant positive effect on spot oil prices at the 60th and 75th percentile whereas spot oil prices were found to have a significant positive effect on the futures oil prices at the lower tail (0.1, 0.2, and 0.25 quantiles). For gold prices, futures gold prices had a significant positive effect on spot gold prices at the 75th percentile (3rd quantile) marked as the upper tail of the distribution whereas a significant negative effect was revealed at the middle quantile (50th percentile). For cocoa prices, both the OLS and the QR estimators were significant in either direction. A significant positive effect of futures (spot) cocoa price on spot (futures) cocoa price was observed across all quantiles in both directions. The results suggest that speculators and arbitrageurs in the commodity market must be concerned about the causality moving from one direction to another and take appropriate investment positions that protect their interests.
Highlights
Market participants and traders in currency and commodity markets have remained concerned about the importance, differences, and trade implications meted out by the arguments surrounding spot prices and futures prices in price discovery and price determination
The following pieces of literature adduce shreds of evidence to suggest that commodity futures prices cause commodity spot prices (Silvapulle & Moosa, 1999; Moosa & Al-Loughani, 1995) for the following reasons: that futures prices adapt to new news more quickly than spot prices; that futures are more susceptible to market manipulations and; that futures serve as guideposts for speculators and arbitrageurs
Whereas the first part presents preliminary results including descriptives, Augmented Dickey-Fuller (ADF), KPSS, normality test, and BDS test, the second discusses the empirical results based on the quantile regression
Summary
Market participants and traders in currency and commodity markets have remained concerned about the importance, differences, and trade implications meted out by the arguments surrounding spot prices and futures prices in price discovery and price determination. To this end, the causal link between commodity spot and futures market has remained debatable and inconclusive. The nature of uncertainty surrounding the commodity market facilitates policy discussion about the reasons for commodity price fluctuations (Alzahrani, Masih, & Al-Titi, 2014). The following pieces of literature adduce shreds of evidence to suggest that commodity futures prices cause commodity spot prices (Silvapulle & Moosa, 1999; Moosa & Al-Loughani, 1995) for the following reasons: that futures prices adapt to new news more quickly than spot prices; that futures are more susceptible to market manipulations and; that futures serve as guideposts for speculators and arbitrageurs
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