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Price overreactions in the commodity futures market: An intraday analysis of the Covid-19 pandemic impact

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  • Borgards, Oliver
  • Czudaj, Robert L.
  • Hoang, Thi Hong Van

Abstract

The objective of this paper is to examine the overreaction behavior of 20 commodity futures based on intraday data from November 20, 2019 to June 3, 2020 with a focus on the impact of the Covid-19 pandemic. A dynamic and non-parametric approach is applied on intraday data for four different frequencies (from 1 min to 1 h) and two different sub-periods (pre-Covid-19 pandemic and during Covid-19 pandemic) in order to detect overreaction behavior which is defined as a large change of prices followed by proportional price reversals. Our empirical findings show that the overreaction hypothesis is confirmed for the considered commodity futures. Furthermore, both the number and the amplitude of overreactions is higher during the Covid-19 pandemic. Our findings also indicate that soft and metal commodities show much less overreactions than precious metals and especially energy commodities. In particular, crude oil futures exhibit a different overreaction behavior compared to other commodities since it has a higher number of negative than positive overreactions during the Covid-19 pandemic. We also find that the data frequency is independent of the overreacting behavior in both periods as the results continuously improve when having more observations due to higher frequencies. Finally, we find that extreme overreactions during the Covid-19 pandemic provide a great potential for profitable trading returns, which can be exploited by traders.

Suggested Citation

  • Borgards, Oliver & Czudaj, Robert L. & Hoang, Thi Hong Van, 2021. "Price overreactions in the commodity futures market: An intraday analysis of the Covid-19 pandemic impact," Resources Policy, Elsevier, vol. 71(C).
    • Handle: RePEc:eee:jrpoli:v:71:y:2021:i:c:s0301420720309946
    DOI: 10.1016/j.resourpol.2020.101966
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    More about this item

    Keywords

    Commodities; Overreaction; Mean reversion; Turning point; Trading strategy;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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