China Nonferrous Metal Futures Market Inverse Balassa-samuelson Effect Of Empirical Research And Theoretical Exploration

Futures price volatility is an important measure for futures market risk, and its influential factors have long been receiving attention from scholars and market participants. Time to delivery is among those factors. Samuelson’s claim in1965that futures price volatility increases as it approaches to maturity is known as the Samuelson effect. The following theoretical studies correlate the Samuelson effect with factors reflecting futures fundamentals, such inventory effect and seasonal effect. Empirical studies on the U. S. and European futures markets show that futures with significant seasonal effect (agricultural futures) and inventory effect (industrial metal and energy futures) exhibit significant Samuelson effect, while futures without these effects (precious metal and financial futures) don’t. However, reverse Samuelson effect which means futures price volatility decreases as maturity approaches has been observed in China’s nonferrous futures. Therefore, this paper aims to provide empirical evidence for the existence of the reverse Samuelson effect in China’s copper, aluminum and zinc futures, and then to make theoretic explanation from the perspective of prospect theory.Empirical analysis of this paper starts from the F test, which concludes that copper, aluminum and zinc futures demonstrate stronger reverse Samuelson effect than Samuelson effect. Then by taking monthly variance of future prices of consecutive i month (i=1,2,3,4) as the explained variable, and the calendar effect as the control, this paper uses OLS method and finds that when time to delivery decreases, monthly price variance decreases, so the reserve Samuelson effect exists. Then daily price volatility is treated as the explained variable, the inventory effect, LME factor and the lagging terms of its own volatility are included into an equation system. By using the SUR method, this paper concludes that reverse Samuelson effect exist in consecutive month i (i=1,2,3,4) for China’s copper, aluminum and zinc.After the empirical analysis, this paper claims that because of the existence of natural short hedgers who cannot hedge in the futures market but can only sell in the spot market due to their own constraints, the spot market demonstrates mean reversion patterns owing to their "sell-in-upward-market-and-hold-in-downward-market" behavior. The near-term future prices highly correlate with spot prices, thus having smaller volatility. While the long-term future prices follow the fundamentals, the reverse Samuelson effect is justified. This paper extends the spectrum of conditions of Samuelson effect by adding that the special features of markets and their participants may subject near-and long-term futures prices to different factors, and then reverse Samuelson effect may be possible.