Cointegration analysis of metals futures

Clinton Watkins and Michael McAleer

Mathematics and Computers in Simulation (MATCOM), 2002, vol. 59, issue 1, 207-221

Abstract: The London Metal Exchange (LME) is a centre for spot and futures trading in the main industrially-used non-ferrous metals. In this paper, the market for 3-month LME copper futures contracts is analysed. The risk premium hypothesis and the cost-of-carry (COC) model are the standard theoretical models for pricing futures contracts, but these two models have rarely been estimated within a unified framework for metals futures. Single equation versions of the risk premium hypothesis and the COC model are nested within a general model. If the spot price, futures price, interest rate and stock level variables contain stochastic trends, long-run versions of the general model can be estimated within the cointegration framework. The long-run pricing models are estimated using daily LME copper price data over the period 3 January 1989 to 30 September 1998. Likelihood ratio tests are used to test restrictions on the general model.

Keywords: Risk premium hypothesis; Cost-of-carry model; Futures contracts (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:59:y:2002:i:1:p:207-221

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