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An Analysis of the Variance and Distribution of Commodity Price Changes

Author

Listed:
  • Stephen J. Taylor

    (Department of Operational Research, Lancaster University, UK. We wish to thank the UK Science Research Council for supporting part of the research and the referees for their helpful comments.)

  • Brian G. Kingsman

    (Department of Operational Research, Lancaster University, UK. We wish to thank the UK Science Research Council for supporting part of the research and the referees for their helpful comments.)

Abstract

A method of jointly estimating the time-dependent variance of daily commodity price changes and their distribution is presented. The data are copper spot prices (1966-74) and sugar futures prices (1961-73), for London contracts. Much of the leptokurtosis observed in the price change distributions is shown to result from the mixinq of non-normal distributions whose variances differ substantially. There are important consequences for conventional autocorrelation tests, which falsely assume a constant variance. The usefulness of the logarithmic transformation of prices is assessed statistically and it is found that the transformation does help to equalise the variance of price changes.

Suggested Citation

  • Stephen J. Taylor & Brian G. Kingsman, 1979. "An Analysis of the Variance and Distribution of Commodity Price Changes," Australian Journal of Management, Australian School of Business, vol. 4(2), pages 135-149, October.
    • Handle: RePEc:sae:ausman:v:4:y:1979:i:2:p:135-149
    DOI: 10.1177/031289627900400205
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    References listed on IDEAS

    as
    1. Blattberg, Robert C & Gonedes, Nicholas J, 1974. "A Comparison of the Stable and Student Distributions as Statistical Models for Stock Prices," The Journal of Business, University of Chicago Press, vol. 47(2), pages 244-280, April.
    2. Fielitz, Bruce D., 1971. "Stationarity of Random Data: Some Implications for the Distribution of Stock Price Changes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 6(3), pages 1025-1034, June.
    3. Dean W. Wichern & Robert B. Miller & Der‐Ann Hsu, 1976. "Changes of Variance in First‐Order Autoregressive Time Series Models—With an Application," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 25(3), pages 248-256, November.
    4. Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-155, January.
    5. Westerfield, Randolph, 1977. "The Distribution of Common Stock Price Changes: An Application of Transactions Time and Subordinated Stochastic Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(5), pages 743-765, December.
    6. Nelson, Harold Jr. & Granger, C. W. J., 1979. "Experience with using the Box-Cox transformation when forecasting economic time series," Journal of Econometrics, Elsevier, vol. 10(1), pages 57-69, April.
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    Cited by:

    1. Steeley, James M. & Matyushkin, Alexander, 2015. "The effects of quantitative easing on the volatility of the gilt-edged market," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 113-128.

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