A dynamic analysis of the distribution of commodity futures and spot prices

Jian Li and Jean‐Paul Chavas

American Journal of Agricultural Economics, 2023, vol. 105, issue 1, 122-143

Abstract: This paper investigates the role of futures markets and their dynamic effects on the stability of commodity prices. The analysis is based on combining two econometric approaches: a quantile vector autoregression (QVAR) model of the marginal distributions of futures and spot prices, and a copula of their joint distribution. Applied to the US soybean and corn markets over the period of 1980–2019, the econometric investigation finds evidence of nonlinear price dynamics that depend on the maturity of the futures contract and documents how marginal price distributions and associated moments evolve over time. Based on the estimates of the QVAR model, we provide evidence of local instability in the upper tail of the price distributions. We find that the futures market helps stabilize the market under nearby futures contract maturity. We document the presence of nonlinear cointegration relationships between futures and spot price. Relying on a copula, we find a positive contemporaneous codependence between futures price and spot price across all quantiles, codependence that varies with the futures contract maturity. We also present evidence of a time‐varying basis that affects the convergence properties of the futures and spot price. Our findings shed new light on the joint determination of futures and spot price in commodity markets.

Date: 2023
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https://doi.org/10.1111/ajae.12309

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Persistent link: https://EconPapers.repec.org/RePEc:wly:ajagec:v:105:y:2023:i:1:p:122-143

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