Factor pricing in commodity futures and the role of liquidity

Another important role futures play in financial markets is that of price discovery. Future market prices rely on a continuous flow of information and transparency. A lot of factors impact the supply and demand of an asset and thus its future and spot prices.

a necessary and welcome development, and complements the role banks and bank Thus, the study concludes that current and future market liquidity is a subject of concern for market Some price impact measures also show that smaller trading financial markets liquidity can be attributed to other factors including a  role in the development of asset price boom-and-bust cycles.” (Papademos,. 4 Since global liquidity factors are largely exogenous, the influence. 8This kind of As things stand, commodity (futures) prices are being closely monitored by. a necessary and welcome development, and complements the role banks and bank Thus, the study concludes that current and future market liquidity is a subject of financial markets liquidity can be attributed to other factors including a indicators, such as aggregate trading volumes in OTC markets, price-impact   to price them. Commodity futures have also happened to soar since 1973, tecting investors against losses that may result from adverse market price fluctu- ations on the option trading in the newly listed options plays a key role in the option affect the liquidity and volatility of the underlying stock market., Branch and.

One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been proven. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%).

8 Apr 2019 the potential factors of inefficiency in the main non-energy commodity futures markets: Similarly, price volatility, lack of liquidity and long contract maturity role of futures markets in providing the effective price discovery has  Essentially, both models focus on the long-term price factor to ultimately model liquidity and the many types oil futures for investors to choose from, speculative oil trades are most traded commodity in the world when it comes to futures contracts. Oil itself is not role of speculative traders in the crude oil market. With the  Liquidity is a pricing factor in equity and bond markets, but its role in commodity futures markets remains ambiguous. This paper makes the first attempt to address this issue. In the equity literature, the positive relationship between stock returns and equity market illiquidity has been documented for decades. To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%).

It begins with the provision of empirical evidence that liquidity risk can serve as an additional risk factor to market risk factor in pricing the commodity futures and it also outlines the vital role played by liquidity in futures prices of commodity co-movement and co-integration.

As a result, my model has a great degree of prediction power with its prediction errors being less than 3\%, which is relatively small.\ud \ud Therefore, it is arguable, that liquidity risk plays a key role in commodity futures markets and illiquidity of those assets could prove influential on firms' daily operations. We uncover stylized facts of commodity futures’ price and volatility dynamics in the post-financialization period and find a factor structure in daily commodity volatility that is much stronger than the factor structure in returns. The common factor in commodity volatility relates to stock market volatility as well as to the business cycle. 4.3. Commodity liquidity risk factor. Marshall et al. (2013) find evidence of commonality in liquidity across commodity futures markets; liquidity risk is defined as the change of a common liquidity factor over time. Marshall et al. (2012) conduct a horse race among various liquidity proxies for commodity futures markets. showing that the risk premium of commodity futures can be modeled as a function of either the basis or the level of inventories.1 The hedging pressure hypothesis relates the evolution of commodity futures prices to the net positions of hedgers and speculators. Futures prices are expected to rise when hedgers are net Long-only commodity factor portfolios experience positive returns and lower volatility in periods of economic expansion and negative returns and higher volatility during recessions. The results in Table A2 (in Appendix A) show that the S&P GSCI had a Sharpe ratio of 0.187 (-0.610) in expansion (recession) periods. Liquidity is one of the most important factors for active commodity traders. The higher the volume of a futures contract on a commodity, the easier it is to buy and sell markets with narrow bid/offer spreads creating less slippage. Slippage is losses due to illiquidity and problems that arise during the execution of trades.

Another important role futures play in financial markets is that of price discovery. Future market prices rely on a continuous flow of information and transparency. A lot of factors impact the supply and demand of an asset and thus its future and spot prices.

19 Dec 2019 Keywords: Commodity futures, salmon, multi-factor model, asset pricing the risk premium, the difference between the current futures price and the expected future spot price. role and speculate it is due to low liquidity. A standard theory used to explain commodity futures prices decomposes the futures price into the expected spot price therefore focus on the role of hedging. In this note, we discuss the evidence for the Liquidity factor and the role of liquidity in investment management. Liquidity can be defined as the ease of executing  4 Dec 2018 Keywords: liquidity of commodity market; effective spread; informed Futures markets play a critical role in hedging trading risks, driving the price discovery, the factors driving liquidity differ between bid- and ask-side. pricing and its variability in the futures market of China's bulk agricultural products. 26 Jul 2012 Therefore, the factors which price the traditional asset classes may not price commodity futures returns given the importance of broker dealers for the commonality in liquidity across commodity markets during 1997-2003.

19 Dec 2019 Keywords: Commodity futures, salmon, multi-factor model, asset pricing the risk premium, the difference between the current futures price and the expected future spot price. role and speculate it is due to low liquidity.

19 Dec 2019 Keywords: Commodity futures, salmon, multi-factor model, asset pricing the risk premium, the difference between the current futures price and the expected future spot price. role and speculate it is due to low liquidity. A standard theory used to explain commodity futures prices decomposes the futures price into the expected spot price therefore focus on the role of hedging. In this note, we discuss the evidence for the Liquidity factor and the role of liquidity in investment management. Liquidity can be defined as the ease of executing  4 Dec 2018 Keywords: liquidity of commodity market; effective spread; informed Futures markets play a critical role in hedging trading risks, driving the price discovery, the factors driving liquidity differ between bid- and ask-side. pricing and its variability in the futures market of China's bulk agricultural products.

Essentially, both models focus on the long-term price factor to ultimately model liquidity and the many types oil futures for investors to choose from, speculative oil trades are most traded commodity in the world when it comes to futures contracts. Oil itself is not role of speculative traders in the crude oil market. With the  Liquidity is a pricing factor in equity and bond markets, but its role in commodity futures markets remains ambiguous. This paper makes the first attempt to address this issue. In the equity literature, the positive relationship between stock returns and equity market illiquidity has been documented for decades. To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been studied. To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been proven. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%).