The untold story of commodity futures in China

Abstract

We investigate the behavior of commodity futures risk premia in China. In the presence of retail‐dominance and barriers‐to‐entry, the term structure and momentum premia remain persistent, whereas hedging pressure, skewness, volatility, and liquidity premia are distorted by time‐varying margins and strict position limits. Furthermore, open interest, currency, and inflation premia are sensitive to institutional settings. The observed premia cannot be attributed to common risks, sentiment, transactions costs, or data‐snooping, but are related to liquidity, anchoring, and regulation‐induced limits‐to‐arbitrage. We highlight the distinctive features of Chinese futures markets and assess the challenges posed to theories of commodity risk premia.

Price discovery in chinese agricultural futures markets: A comprehensive look

“…The most striking difference, however, is that five out of these 11 commodity futures markets where futures are found to lead national cash prices unidirectionally in the long run using most active futures prices, now are shown to have bidirectional feedback with national cash prices. The finding is clearly in line with the argument of less informational content in the nearby futures prices in China, due to its lower trading volume (e.g., Fan & Zhang, 2020). We thus provide the first empirical evidence for the importance of using most active futures contracts in China, particularly in the context of examining price discovery performance of futures markets.…”

“…Among which, the Zhengzhou Commodity Exchange and Dalian Commodity Exchange trade agricultural commodities. Wellenreuther and Voelzke (2019) and Fan and Zhang (2020) have discussions on Chinese commodity futures markets. In this paper, we use 11 agricultural commodities futures that are most traded in the two commodity exchanges as well as in the world.…”

“…We use the closing price of the respective most active futures contract as the futures price series during the time period. As pointed out in Fan and Zhang (2020), the nearby futures contracts in China typically are not the most active and account for less than 10% of total volume traded on the futures curve. Instead, longer‐dated futures contracts with specific maturities tend to be most active as they are preferred by Chinese investors.…”

“…Furthermore, individual domestic investors dominate commodity futures markets in China including agricultural futures markets. Individual investors tend to be less informed, less sophisticated and more speculative (China Futures Year Book, 2017; Fan & Zhang, 2020). Thus, the lack of domestic and foreign institutional investors could affect the price discovery performance of agricultural commodities futures in China.…”

Managing volatility in commodity momentum

“…Therefore, comprehensive empirical investigations on risk–return tradeoffs are needed. While a few recent studies (Fan & Zhang, 2020; He et al, 2019; Kang & Kwon, 2017; Li et al, 2017) have already investigated commodity portfolio strategies in China, we differ from these previous studies by highlighting the importance of managing volatility in commodity momentum investing.…”