Regime-dependent adjustment in energy spot and futures markets

Abstract

This paper analyzes the relationship between the spot and futures prices of energy commodities from a new perspective. Taking data from the Dow Jones UBS Commodity Index, we first test for a long-run relationship between spot and futures prices. As a second step, smooth transition models are fitted to examine whether the adjustment of spot returns to the forward premium follows a nonlinear path. Although the findings show that the informational content of futures prices varies between different commodities, a similar pattern arises in all of them: the predictive power of futures prices can be observed only if previous volatility or the basis has been low, while no relationship arises if both have previously been high. Hence, past relative volatility is important for the present price discovery function.