Abstract
The purpose of this paper is to analyze market reflexivity in agricultural futures contracts with different maturities. To this end, we apply a four-dimensional Hawkes model to storable and non-storable agricultural commodities. We find market reflexivity for both storable and non-storable commodities. Reflexivity accounts for about 50 to 70% of the total trading activity. Differences between nearby and deferred contracts are less pronounced for non-storable than for storable commodities. We conclude that the co-existence of exogenous and endogenous price dynamics does not change qualitative characteristics of the price discovery process that have been observed earlier without the consideration of market reflexivity.
Highlights
Prices of commodity futures contracts with different maturities are linked through the forward curve
Our objective is to examine price discovery in nearby and deferred agricultural futures contracts while explicitly taking into account potential market reflexivity
We explore whether price discovery and potential market reflexivity differ between storable and non-storable commodities
Summary
Prices of commodity futures contracts with different maturities are linked through the forward curve. Understanding of the shape and the characteristics of the term structure is of utmost importance for storage decisions, hedging and roll-over strategies as well as calendar spread trading. Several strands of literature address this topic. The theoretical underpinning of the forward curve goes back to Working’s (1949) theory of storage that establishes an equilibrium relation between nearby and distant futures contracts and explains storage under backwardation by the concept of convenience yield (Brennan 1958). Keynes’ theory of normal backwardation decomposes a futures price into an expected future spot price and an expected risk premium that risk-averse hedgers grant to speculators (Fama and French 1987). The statistical modelling of the forward curve has benefitted from
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