Abstract
This paper systematically explores liquidity and volatility forecasting for Aluminum, Copper, Fuel Oil, and Sugar futures contracts in China using intraday and daily data. Adopting three popular liquidity estimators, we first show that contracts with three months to delivery enjoy the best liquidity for all commodities under scrutiny. The finding that nearby contracts are less liquid than the more distant contracts is novel and contrary to the pattern in other major futures markets, and it results from unique institutional regulation in the Chinese futures markets. Utilizing more distant contracts and implementing four widely adopted volatility models for forecasting against alternative true volatility proxies, we provide strong evidence that the ARFIMA model consistently produces the best forecasts or forecasts not inferior to the best. This is robust for contracts with different liquidity levels.
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