Interconnectedness between Commodity Futures and Spot Prices: A Comparative Analysis between Ordinary Least Square (OLS) and Quantile Regression (QR)

Abstract

The study sought to contribute to the extant literature on the interconnectedness between commodity spot prices and futures prices by covering daily data from 2001-2019. Employing the OLS and the QR, different dynamics of the relationship between commodity spot and futures prices emerged from the study. For oil and gold prices, OLS estimator revealed that neither spot nor futures prices of the commodities had a significant effect on the other. Quantile regression estimators however suggested otherwise. For oil prices, futures prices were found to have a significant positive effect on spot oil prices at the 60 th and 75 th percentile whereas spot oil prices were found to have a significant positive effect on the futures oil prices at the lower tail (0.1, 0.2, and 0.25 quantiles). For gold prices, futures gold prices had a significant positive effect on spot gold prices at the 75 th percentile (3 rd quantile) marked as the upper tail of the distribution whereas a significant negative effect was revealed at the middle quantile (50 th percentile). For cocoa prices, both the OLS and the QR estimators were significant in either direction. A significant positive effect of futures (spot) cocoa price on spot (futures) cocoa price was observed across all quantiles in both directions. The results suggest that speculators and arbitrageurs in the commodity market must be concerned about the causality moving from one direction to another and take appropriate investment positions that protect their interests.