The Empirical Studies On Information Implied In The Term Structure Of Commodity Futures Prices

The term structure of futures price refers to the relation between futures price and different maturities at a point. Also the term structure is a representation of the inter-temporal price relationship between futures contracts with different maturities, indicating changes between futures price and spot price over time. It is the comprehensive reaction to all the market information available, also the investors'comprehensive expect to the future price trend, so it plays an important part to the hedging and price discovering of futures.This paper gives a research on the term structure of commodity futures prices in China. Firstly,We use weekly settlement prices of9most representative underlying from Shanghai Futures Exchange(SHFE), Dalian Commodity Exchange(DCE) and Zhengzhou Commodity Exchange(CZCE) as a sample, covering the period from October2004to May2011. This paper applies principal component analysis(PCA) to the term structure of commodity futures price in China to explore the dynamics of term structure, finding the first three principal component(PCs) basically explains the85%of variance of the dynamic futures price term structures. The first principal components (PCs) can be called as level factor, corresponding to the biggest eigenvalue of futures price variance-covariance matrix, reflecting that parallel shift factors play a leading role to the dynamic futures price term structures, so the increase of this factor can lead to the increase of all futures contracts; The second PCs represents steepness factor, corresponding to the second eigenvalue which is related to the slope of the term structure, so this factor can make short-term and long-term futures contract change in different directions, and therefore change the solpe of the term structure curve; The third PCs, corresponding to the third eigenvalue, can be interpreted as curvature factor which is closely related to the curvature of the term structures curve, so this factor can make mid-term futures move toward opposite direction comparing to short-term and long-term, and therefore change the curvature of the term structure curve.we formulate three distinctive trading strategies based on the information values of term structure dynamics.By creating two commodity portfolios according to a principal component ranking we significantly outperform a long-only benchmark. It is of great significance for traders to make correct trading strategies. Secondly, based on the principal component analysis to the price term structure, this paper withdraws the latent factor which reflects the dynamics of term structure and examines the relation between the latent factor and inflation by the vector auto regression(VAR) model. The empirical results show that the futures prices term structure contains the information of inflation and there exists a stably long-term equilibrium relationship between the latent factor and inflation. From VAR model and the result of the impulse response and variance decomposition, we can find that if there is a positive impact to the latent factor currently, the inflation in the next months will increase gradually, showing significant positive correlation. From the error correction model, when the short-term volatilities of inflation break the long-term equilibrium between inflation and the latent factor,the broad measure of money supply,fixed assets investment foreign exchange reserves, there exists significant reverse adjustments in the system,which will realize the balance of the short-term again. From this relationship, we can call the latent factor of term structure as a leading indicator for predicting the future inflation. In short, the study on the term structure of commodity futures prices can not only provide valuable information for hedging and investment decision but also have great sense for policy makers to make macroeconomic policy.