IDEAS home Printed from https://ideas.repec.org/p/ags/aaea04/20095.html
   My bibliography  Save this paper

Are Interest Rates Necessary For Temporal Cointegration? Evidence From The London Metal Exchange (Lme)

Author

Listed:
  • Zhou, Haijiang
  • Roberts, Matthew C.
  • Zulauf, Carl R.

Abstract

This study examines the long run relationship between 1-day and 3-month futures prices for five metals at the London Metal Exchange (LME) and further investigates the role of interest rates in this relationship. A battery of stationarity tests and cointegration tests are applied to a simple cost of carry model, which contains the interrelationship between prices of the same commodity for delivery at two different dates and the cost of carry term. Results provide strong evidence that 1-day and 3-month metals futures prices are cointegrated and that interest rates are not needed to find this cointegration. These findings are confirmed in an analysis of the truncated sample period of 1979-1984 when the interest rates were highly volatile. Our finding calls into question the role of interest rates in the cointegration of temporal spreads, such as their proposed role in cash-futures cointegration, and seems to at odds with the cost of carry theory. To examine this anomaly, a further analysis of a quadvariate cointegration is conducted and results show that cointegration exists for 1-day and 3-month metals futures prices, 3-month interest rates and physical storage costs. These findings are consistent with Working's cost of carry theory.

Suggested Citation

  • Zhou, Haijiang & Roberts, Matthew C. & Zulauf, Carl R., 2004. "Are Interest Rates Necessary For Temporal Cointegration? Evidence From The London Metal Exchange (Lme)," 2004 Annual meeting, August 1-4, Denver, CO 20095, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea04:20095
    DOI: 10.22004/ag.econ.20095
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/20095/files/sp04zh24.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.20095?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    2. Jian Yang & David A. Bessler & David J. Leatham, 2001. "Asset storability and price discovery in commodity futures markets: A new look," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(3), pages 279-300, March.
    3. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    4. Heaney, Richard, 2002. "Does knowledge of the cost of carry model improve commodity futures price forecasting ability?: A case study using the London Metal Exchange lead contract," International Journal of Forecasting, Elsevier, vol. 18(1), pages 45-65.
    5. T. Randall Fortenbery & Hector O. Zapata, 1997. "An evaluation of price linkages between futures and cash markets for cheddar cheese," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(3), pages 279-301, May.
    6. Sabuhoro, Jean Bosco & Larue, Bruno, 1997. "The market efficiency hypothesis: The case of coffee and cocoa futures," Agricultural Economics, Blackwell, vol. 16(3), pages 171-184, August.
    7. T. Randall Fortenbery & Hector O. Zapata, 1993. "An examination of cointegration relations between futures and local grain markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(8), pages 921-932, December.
    8. repec:bla:jfinan:v:43:y:1988:i:5:p:1075-93 is not listed on IDEAS
    9. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    10. Baillie, Richard T & Myers, Robert J, 1991. "Bivariate GARCH Estimation of the Optimal Commodity Futures Hedge," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(2), pages 109-124, April-Jun.
    11. Brenner, Robin J. & Kroner, Kenneth F., 1995. "Arbitrage, Cointegration, and Testing the Unbiasedness Hypothesis in Financial Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 30(1), pages 23-42, March.
    12. Sabuhoro, Jean Bosco & Larue, Bruno, 1997. "The market efficiency hypothesis: The case of coffee and cocoa futures," Agricultural Economics, Blackwell, vol. 16(3), pages 171-184, August.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hector O. Zapata & T. Randall Fortenbery, 1996. "Stochastic Interest Rates and Price Discovery in Selected Commodity Markets," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 18(4), pages 643-654.
    2. Andrew McKenzie & Matthew Holt, 2002. "Market efficiency in agricultural futures markets," Applied Economics, Taylor & Francis Journals, vol. 34(12), pages 1519-1532.
    3. Yang Hou & Steven Li, 2013. "Price Discovery in Chinese Stock Index Futures Market: New Evidence Based on Intraday Data," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 20(1), pages 49-70, March.
    4. Malini, Nair, 2005. "Arbitrage, Cointegration and Testing the Unbiasedness Hypothesis in Coffee Futures Traded at the CSCE," MPRA Paper 37857, University Library of Munich, Germany.
    5. Wu, Ziping & Merlean, Seamus, 2003. "Market efficiency in the reformed Chinese grain marketing system," China Economic Review, Elsevier, vol. 14(2), pages 115-130.
    6. Jerry Coakley & Jian Dollery & Neil Kellard, 2011. "Long memory and structural breaks in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(11), pages 1076-1113, November.
    7. Shashi Gupta & Himanshu Choudhary & D. R. Agarwal, 2018. "An Empirical Analysis of Market Efficiency and Price Discovery in Indian Commodity Market," Global Business Review, International Management Institute, vol. 19(3), pages 771-789, June.
    8. Wang, Xiaolei & Lin, Boqiang, 2016. "How to reduce CO2 emissions in China׳s iron and steel industry," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 1496-1505.
    9. Guglielmo Maria Caporale & Davide Ciferri & Alessandro Girardi, 2014. "Time-Varying Spot and Futures Oil Price Dynamics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 61(1), pages 78-97, February.
    10. Lin, Boqiang & Moubarak, Mohamed, 2014. "Estimation of energy saving potential in China's paper industry," Energy, Elsevier, vol. 65(C), pages 182-189.
    11. Richard Heaney, 1998. "A Test of the cost‐of‐carry relationship using the London Metal Exchange lead contract," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(2), pages 177-200, April.
    12. Judge, Amrit & Reancharoen, Tipprapa, 2014. "An empirical examination of the lead–lag relationship between spot and futures markets: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 29(C), pages 335-358.
    13. H. Holly Wang & Bingfan Ke, 2005. "Efficiency tests of agricultural commodity futures markets in China," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 49(2), pages 125-141, June.
    14. Myers, Robert J., 1994. "Time Series Econometrics and Commodity Price Analysis: A Review," Review of Marketing and Agricultural Economics, Australian Agricultural and Resource Economics Society, vol. 62(02), pages 1-15, August.
    15. Sibanjan Mishra, 2019. "Testing Martingale Hypothesis Using Variance Ratio Tests: Evidence from High-frequency Data of NCDEX Soya Bean Futures," Global Business Review, International Management Institute, vol. 20(6), pages 1407-1422, December.
    16. Lin, Boqiang & Moubarak, Mohamed, 2014. "Mitigation potential of carbon dioxide emissions in the Chinese textile industry," Applied Energy, Elsevier, vol. 113(C), pages 781-787.
    17. Lin, Boqiang & Zhang, Li & Wu, Ya, 2012. "Evaluation of electricity saving potential in China's chemical industry based on cointegration," Energy Policy, Elsevier, vol. 44(C), pages 320-330.
    18. Randall Fortenbery, 2004. "Developed speculation and underdeveloped markets--the role of futures trading on export prices in less developed countries," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 31(4), pages 451-471, December.
    19. Lin, Boqiang & Wang, Xiaolei, 2014. "Promoting energy conservation in China's iron & steel sector," Energy, Elsevier, vol. 73(C), pages 465-474.
    20. Gomez, Miguel I. & Koerner, Julia, 2009. "Do retail coffee prices increase faster than they fall? Asymmetric price transmission in France, Germany and the United States," Working Papers 55930, Cornell University, Department of Applied Economics and Management.

    More about this item

    Keywords

    Demand and Price Analysis;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:aaea04:20095. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aaeaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.