Nonlinearities in the price behaviour of agricultural products: The case of cotton

Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. The interaction of the factors related to the inventories and other financial sources result in a complex futures price behaviour especially in the case of agricultural products. This behaviour has been surveyed and described with non-linear testing and modelling, respectively, within the last decades. The same process has been used to describe the formation of commodity prices. In the present study a number of univariate tests confirm the existence of nonlinearity in the cotton futures price formation, while a Mackey GARCH model is used to describe the returns’ behaviour. This model selection is based upon the consideration of the mean process as dynamic chaotic. The model can be a useful in making a short term forecasts.

[1]  Apostolos Serletis,et al.  Univariate Tests for Nonlinear Structure , 2006 .

[2]  Lilian Ng,et al.  The sources of GARCH: empirical evidence from an intraday returns model incorporating systematic and unique risks , 1993 .

[3]  Gabriel J. Power,et al.  Long-range dependence in the volatility of commodity futures prices: Wavelet-based evidence , 2010 .

[4]  The Impact of Stock, Energy and Foreign Exchange Markets on the Sugar Market , 2010 .

[5]  A. I. McLeod,et al.  DIAGNOSTIC CHECKING ARMA TIME SERIES MODELS USING SQUARED‐RESIDUAL AUTOCORRELATIONS , 1983 .

[6]  Stephen Figlewski.  Futures Trading and Volatility in the GNMA Market , 1981 .

[7]  T. Schwarz,et al.  Dynamic efficiency and price leadership in stock index cash and futures markets , 1991 .

[8]  M. Anson.  Financial Market Dislocations and Hedge Fund Returns , 2002 .

[9]  Campbell R. Harvey,et al.  The Strategic and Tactical Value of Commodity Futures , 2006 .

[10]  B. Brorsen,et al.  Daily futures price changes and non-linear dynamics , 1994 .

[11]  A. Lo,et al.  THE ECONOMETRICS OF FINANCIAL MARKETS , 1996, Macroeconomic Dynamics.

[12]  B. LeBaron,et al.  A test for independence based on the correlation dimension , 1996 .

[13]  Wei Xiong,et al.  Index Investment and the Financialization of Commodities , 2010 .

[14]  Ming-Shiun Pan,et al.  The distribution of currency futures price changes: A two-piece mixture of normals approach , 1995 .

[15]  Ronald W. Anderson.  Some determinants of the volatility of futures prices , 1985 .

[16]  J. Elder,et al.  Long Memory in Commodity Futures Volatility: A Wavelet Perspective , 2007 .

[17]  Michel Terraza,et al.  Seasonal Mackey-Glass-Garch Process and Short-Term Dynamics , 2008 .

[18]  L. Glass,et al.  Oscillation and chaos in physiological control systems. , 1977, Science.

[19]  Sang Bin Lee,et al.  Stock index futures listing and structural change in time‐varying volatility , 1992 .

[20]  Michael S. Haigh,et al.  Commodities and Equities: Ever a “Market of One”? , 2009, The Journal of Alternative Investments.

[21]  Zhongquan Zhou.  An Equilibrium Analysis of Hedging with Liquidity Constraints, Speculation, and Government Price Subsidy in a Commodity Market , 1998 .

[22]  S. Thorp,et al.  Financialization, Crisis and Commodity Correlation Dynamics , 2013 .

[23]  Brian D. Wright,et al.  Storage and Commodity Markets , 1991 .

[24]  William A. Barnett,et al.  A single-blind controlled competition among tests for nonlinearity and chaos , 1997 .

[25]  Catherine Kyrtsou,et al.  Evidence for Neglected linearity in Noisy Chaotic Models , 2005, Int. J. Bifurc. Chaos.

[26]  Robert Rosenman,et al.  Predictable Behavior in Financial Markets: Some Evidence in Support ofHeiner's Hypothesis , 1986 .

[27]  Zvi Bodie,et al.  Risk and Return in Commodity Futures , 1980 .

[28]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[30]  B. Adrangi,et al.  Are commodity prices chaotic , 2002 .

[31]  B. LeBaron,et al.  Nonlinear Dynamics, Chaos, and Instability: Statistical Theory and Economic Evidence , 1991 .

[32]  B. Jacobsen,et al.  Volatility Clustering in Monthly Stock Returns , 2003 .

[33]  Gary B. Gorton,et al.  Facts and Fantasies about Commodity Futures , 2004 .

[34]  Anastasios Malliaris,et al.  Methodological issues in asset pricing: Random walk or chaotic dynamics , 1999 .

[35]  Thomas E. Copeland,et al.  A Model of Asset Trading under the Assumption of Sequential Information Arrival , 1976 .

[36]  R. Heiner.  The Origin of Predictable Behavior , 1983 .

[37]  H. Wang,et al.  Price behavior in China's wheat futures market , 2004 .

[38]  Ronald W. Anderson,et al.  The Time Pattern of Hedging and the Volatility of Futures Prices , 1983 .

[39]  Chin Wen Cheong,et al.  Asymmetry and long-memory volatility: Some empirical evidence using GARCH , 2006 .