Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis ("backwardation"), prior futures returns, and prior spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.

The Fundamentals of Commodity Futures Returns

Portfolios of the Poor: How the World's Poor Live on $2 a Day. By Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. Princeton, NJ: Princeton University Press, 2009, 320 pp., ...

Portfolios of the Poor: How the World's Poor Live on $2 a Day

This paper examine empirically the relation between trades and quote changes for stocks trades in order-driven marketEstimates for samples of Shanghai Stock Exchange and Shenzhen Stock Exchange issues suggest:the price impact of trades is positive and persistent,this means the information content of trades is substantial;Large trades convey more information than small trades;Information asymmetries are more significant for small firms

Measuring the Information Content of Stock Trades

We present strong evidence against the excess-comovement hypothesis—that the prices of commodities move together beyond what can be explained by fundamentals. Prior studies employ broad macroeconomic indicators to explain common price movements, and potentially correlated fundamentals are not controlled for. We use inventory and harvest data to fit a partial equilibrium model that more effectively captures the variation in individual prices. The model explains the majority of the comovements among commodities with high price correlation, and all of the comovements among those with marginal price correlation. Common movements in supply factors appear to play an important role in the observed comovements in commodity prices.

On the Comovement of Commodity Prices

We show that typical behaviors of market participants at the high frequency scale generate leverage effect and rough volatility. To do so, we build a simple microscopic model for the price of an asset based on Hawkes processes. We encode in this model some of the main features of market microstructure in the context of high frequency trading: high degree of endogeneity of market, no-arbitrage property, buying/selling asymmetry and presence of metaorders. We prove that when the first three of these stylized facts are considered within the framework of our microscopic model, it behaves in the long run as a Heston stochastic volatility model, where a leverage effect is generated. Adding the last property enables us to obtain a rough Heston model in the limit, exhibiting both leverage effect and rough volatility. Hence we show that at least part of the foundations of leverage effect and rough volatility can be found in the microstructure of the asset.

The microstructural foundations of leverage effect and rough volatility

This paper examines who contributes and who persists in contributing in a national, voluntary, defined contributory pension programme, where the government provides the incentive of matching contributions of a minimum amount (USD 16). The paper uses proprietary data from a financial services firm where 12 per cent of customers (37,000 individuals) chose to participate in this programme. The evidence shows that only about 50 per cent of contributors reach the minimum amount for the co-contribution, but that participants persist in contributing even if they failed to contribute the minimum amount in a given year. While this paper does not provide causal estimates, it does present evidence of considerable interest among the informal sector in a state-run voluntary pension programme in an emerging market where access to formal finance is otherwise poor.

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In Search of Inclusion: Informal Sector Participation in a Voluntary, Defined Contribution Pension System

Option markets have significant variation in liquidity across different option series. Illiquidity reduces the informativeness of the price. Price information for illiquid options is more noisy, and thus the implied volatilities (IVs) based on these prices are more noisy. In this study, we propose weighting schemes to estimate IV, which reduce the importance attached to illiquid options. The two indexes using liquidity weights are SVIX, which is a spread-adjusted volatility index, and TVVIX, which is a traded volume weighted VIX. We find SVIX outperforms TVVIX, the conventional schemes such as the traditional VXO, or vega weights, and volatility elasticity weights. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 32:714-742, 2012

Liquidity Considerations in Estimating Implied Volatility

In India, commodity derivatives are traded on exchanges that are separate and distinct from the exchanges on which financial derivatives are traded. This chapter describes the commodities and design of the futures contracts with focus on the market for these commodity derivatives. The Indian commodity futures markets went through a transformation between 2000 and 2003 with significant regulatory liberalization and the creation of three new national, electronic exchanges, each listing scores of products. Today, there are 23 exchanges in India listing futures on physical commodities, including the three national exchanges. The concepts of trading, clearing, and settlement systems are described with special attention to the new national exchange infrastructure that has been put in place since 2002. This includes some innovations and differences between markets in India and outside, such as the process that is in place today to obtain reference prices for the underlying commodities. Equity derivatives have been trading on national electronic exchanges since 2000, while commodity derivatives trading on a similar platform began at the end of 2003. In a relatively short span of just over three years, commodity derivatives markets have reached more than 40 percent of the size of equity derivatives. The behavior of trading volumes and the futures price vis-a-vis the spot price is analyzed. The current regulations that form the underlying legal infrastructure for commodity derivatives trading in India are discussed.

Commodity Futures Markets

Most measures of liquidity assume that the cost of buying and selling is symmetric. This paper analyses liquidity in an open electronic limit order book exchange without market makers, where it is possible to directly measure the impact cost of a market order to buy and to sell. There is clear evidence of liquidity asymmetry on the spot market: large market orders to sell have higher costs compared with buy orders. In an identical microstructure setting, but with no short sales constraints, single stock futures markets show little evidence of liquidity asymmetry. This evidence is consistent with the response of liquidity providers to asymmetric information vis-a-vis informed traders, and implies that short sales constraints are an important source of asymmetry in liquidity.

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Measuring and explaining the asymmetry of liquidity

India's financial markets went from a situation (as of 3 Nov 1994) with one dominant market which used open outcry, to a situation with two competing electronic exchanges (as of 2 June 1995). In this article, we explore the impact of automation and competition upon performance. We examine two measures of liquidity - aggregate trading volume and trading frequency at the security level - and both have improved strongly. The improvement in BSE trading frequency seems to be composed of a strongly positive effect of BOLT and a negative effect caused by competition with the NSE. Clear gains in market efficiency are observed - the short-term correlations of returns are diminished, as is the skewness of returns. We offer circumstantial evidence about an improvement in transparency of the exchange. There is some evidence that volatility has increased under BOLT, and that competition from the NSE has a negative impact upon volatility. We have some evidence that the time-dependance of volatility has increased across the transition.

Susan Thomas

Papers

In Search of Inclusion: Informal Sector Participation in a Voluntary, Defined Contribution Pension System

Liquidity Considerations in Estimating Implied Volatility

Commodity Futures Markets

Measuring and explaining the asymmetry of liquidity

How Competition and Automation Have Changed the Bombay Stock Exchange