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Financial Speculation in Energy and Agriculture Futures Markets: A Multivariate GARCH Approach

This paper analyses futures prices of four energy commodities (crude oil, heating oil, gasoline and natural gas) and five agricultural commodities (corn, oats, soybean oil, soybeans and wheat), over the period 1986–2010. Using DCC multivariate GARCH models, it provides new evidence on four research questions: 1) Are macroeconomic factors relevant in explaining returns of energy and nonenergy commodities? 2) Is financial speculation significantly related to returns in futures markets? 3) Are there significant relationships among returns, either in their mean or variance, across different markets? 4) Is speculation in one market affecting returns in other markets? Results suggest that the S&P 500 index and the exchange rate significantly affect returns. Financial speculation, proxied by Working’s T index, is poorly significant in modelling returns of commodities. Moreover, spillovers between commodities are present and the conditional correlations among energy and agricultural commodities display a spike around 2008.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Investment and Finance – Corporate Strategy; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: Q02: Commodity Markets, Q16: Agricultural R&D; Agricultural Technology; Biofuels; Agricultural Extension Services, Q40: Energy: General, Q41: Energy: Demand and Supply; Prices, G13: Contingent Pricing; Futures Pricing; option pricing, L71: Mining, Extraction, and Refining: Hydrocarbon Fuels

Keywords: Energy, Agricultural commodities, Futures markets, Financial speculation, Multivariate GARCH

DOI: 10.5547/01956574.34.3.4

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Published in Volume 34, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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