Linkages among commodity futures prices in the recent financial crisis: An application of cointegration tests with a structural break

Abstract

In this study, we investigate the existence of long-term co-movements among the prices of commodity futures contracts. We use a cointegration test, which accounts for the presence of a structural break. We show that while there is a long-term relationship among agricultural and among non-agricultural commodity futures prices when a structural break is taken into account, there is no such relationship without allowing for a structural break. We also show that these break points, in fact, occur a few months before the recent global financial crisis. Although the previous literature broadly casts doubt on such price co-movements, our results confirm that market performance improved during the sample period.

Keywords:

• commodity futures
• price discovery
• futures pricing
• financial crises

JEL classifications:

• Financial Crises (G01)
• Contingent Pricing; Futures Pricing (G13)
• Information and Market Efficiency; Event Studies; Insider Trading (G14)

Public Interest Statement

This study on price linkages among commodity futures contracts would be of interest to a wide range of individuals including policy-makers and investors. Commodities and their futures prices have attracted significant attention and have become increasingly important in recent years, because of their numerous advantages. For instance, they can reduce investor risks in financial markets and play an important role in explaining macroeconomic phenomena such as the early stages of recessions for advanced economies, boom and bust cycles for developing countries and sovereign defaults. A key factor in facilitating these advantages is price co-movements among commodities. Unless they are not related, we are not able to detect and use valuable information. Therefore, this study’s findings are a starting point for investors and policy-makers and indicate that more attention should be paid to these price dynamics.

Notes

1. See, for example, Chinn and Coibion (2014) for more discussions.

2. The Nikkei-TOCOM Commodity Index is the aggregated figure of all the Sub Index, multiplied by a weight percentage for each component.

3. This is because those contract-month are the most active. Unlike the Japanese futures contracts, the nearest contracts are usually the most active in the US futures contracts.

4. The TG Index is the aggregated figure of all the Sub Indexes multiplied by a weight percentage for each component. It represents fluctuations in domestic agricultural commodity prices and is used as a benchmark for agricultural commodity investors.

5. This is because those contract-months are the most active. Unlike Japanese futures contracts, the nearest contracts are usually the most active in US futures contracts.

6. See Dickey and Fuller (1979) for details.

7. See Kwiatkowski et al. (1992) for details.

8. The presentation of the Zivot–Andrews test with endogenous structural break detection follows Pfaff (2008).

9. Dawson and White (2002) also applied the Zivot–Andrews tests and showed that no significant structural break is present in any series.

10. The lag length of one is selected according to the BIC.

11. The presentation of the cointegration test with a structural break follows Pfaff (2008).

12. The lag lengths of two and one are chosen following the previous Johansen’s cointegration tests.

13. The other specifications yield consistent results although they are not reported here.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Yoichi Tsuchiya

Yoichi Tsuchiya is an assistant professor at School of Management, Tokyo University of Science, Japan. After MA program, he has worked as an economist at the Japan Center for Economic Research and forecasted the Japanese economy. He received PhD in Economics in June 2013 by Department of Economics, State University of New York at Buffalo.

His research interests are applied econometrics, economic forecasting and macroeconomics. He has published his papers in academic journals including Applied Economics, Economics Letters and International Review of Economic and Finance.