Partially overlapping time series: a new model for volatility dynamics in commodity futures

Authors

  • Aaron Smith

    Corresponding author
    1. Department of Agricultural and Resource Economics, University of California, Davis, USA
    • Department of Agriculture and Resource Economics, University of California, Davis, One Shields Avenue, Davis, CA 95616, USA.
    Search for more papers by this author

Abstract

In commodity futures markets, contracts with various delivery dates trade simultaneously. Applied researchers typically discard the majority of the data and form a single time series by choosing only one price observation per day. This strategy precludes a full understanding of these markets and can induce complicated nonlinear dynamics in the data. In this paper, I introduce the partially overlapping time series (POTS) model to model jointly all traded contracts. The POTS model incorporates time-to-delivery, storability, seasonality and GARCH effects. I apply the POTS model to corn futures at the Chicago Board of Trade and the results uncover substantial inefficiency associated with delivery on corn futures. The results also support two theories of commodity pricing: the theory of storage and the Samuelson effect. Copyright © 2005 John Wiley & Sons, Ltd.

Ancillary