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Long memory and structural breaks in commodity futures markets

Coakley, Jerry; Dollery, Jian; Kellard, Neil

Authors

Jerry Coakley

Neil Kellard

Abstract

This study employs daily data for 14 commodities and three financial assets 1990-2009 to explore the impact of the time series properties of the futures-spot basis and the cost of carry on forward market unbiasedness. The main result is that the basis of 16 assets exhibits both long memory and structural breaks. The long memory in the basis is robust even to the use of break-adjusted data. It implies that the cost-of-carry has long memory which the empirical results confirm using the interest cost as a proxy. These new findings suggest that the forecast error has long memory and are inconsistent with unbiasedness. They could be consistent with a weaker version of market efficiency in the presence of a fractionally integrated, time-varying risk premium but they could also be rationalized by priced noise trader risk with limits to arbitrage in less than fully efficient markets. © 2010 Wiley Periodicals, Inc.

Journal Article Type Article
Publication Date 2011-11
Journal JOURNAL OF FUTURES MARKETS
Print ISSN 0270-7314
Electronic ISSN 1096-9934
Publisher Wiley
Peer Reviewed Peer Reviewed
Volume 31
Issue 11
Pages 1076-1113
Institution Citation Coakley, J., Dollery, J., & Kellard, N. (2011). Long memory and structural breaks in commodity futures markets. Journal of Futures Markets, 31(11), 1076-1113. doi:10.1002/fut.20502
DOI https://doi.org/10.1002/fut.20502
Keywords Economics and Econometrics; Accounting; General Business, Management and Accounting; Finance