Focusing on energy commodities, industrial metals, and gold, this paper examines the degree to which commodity futures returns depend on news sentiment under various market conditions, and the structure of that dependence. We observe an asymmetric market reaction to positive and negative news sentiment, which changes in periods of financial turmoil. The quantile regression analysis shows that news sentiment's influence on the futures returns follows an upward trend at higher percentiles. This structure flattens for positive news during the global financial crisis, while the slope for the negative component steepens in backwardation periods.
Employing a recently developed panel econometric technique, first, we show that accounting for spatial dependence and heterogeneity yields more accurate risk factor coefficients and abnormal housing returns. Rather than systematic risks, idiosyncratic risks explain the variations in residential housing excess returns. After controlling for asset-specific and systematic risk factors, the positive and significant impact of the unobservable common factors on the excess returns suggests that speculative market forces drive the housing excess returns. Second, we then analyze the risks and returns of houses in affordable and expensive submarkets allowing for spatial dependence and heterogeneity. We find that houses in the affordable submarkets perform better than houses in the expensive submarkets. Thus, the potential demand for houses in the affordable submarket may aggravate the housing affordability crisis. Our study’s results, therefore, encourage policymakers and investors to view the housing market as a collection of regional units and submarkets, but not as a single national market.
We propose that an options-based approach is a superior alternative to the traditional cost-of-carry method to model both the behaviour of convenience yields and the commodity price responses to changes in inventory levels. This approach is shown to be more robust and avoids the simplifying assumptions embedded in cost-of-carry valuation which fully accounts for the non-negativity constraint on inventory. Unlike the cost-of-carry approach, the options-based approach does not treat the convenience yield as an exogenous factor. This offers a more natural measure of implied convenience yields in commodity trading strategies. We test the relationship between convenience yields and inventory levels for a number of liquidly traded base metals using both methods. Our results show that the relationship between convenience yields and inventory levels is strongly defined under the options-based approach in line with market beliefs. This result is consistent with other studies that have used the optionsbased approach in other nonmetals commodity markets.
The theory of storage predicts that convenience yield and inventory level of the same commodity are in an inverse relationship. Conceptually, inventories which are readily accessible by market participants at a given location drive the perceived benefits of owning the physical commodity. The price hike observed in the global base metal markets especially during the pre-and post-global financial crisis period is largely attributed to an exponential consumption growth in Asian countries. Geographical location, according to our study, affects the explanatory power of inventories for changes in convenience yield perceived by market participants at a certain location. In particular, we use data for three different regions, namely, Asia, Americas and Europe, for six major base metals. We test whether one certain region explains the changes of convenience yield better than other regions. Our results indicate that the Asian region is more informative than other regions and thereby accessible inventories are likely to have a stronger impact on the perceived convenience yield.
We demonstrate that arbitrage risk, constructed using three measuresnoise trader risk, trading cost and information uncertaintycan predict the return of stocks cross-sectionally in China. The findings are broadly consistent even when out-of-sample tests are conducted using the Fama-MacBeth cross-sectional regression approach. We also construct hypothetical portfolios using the information arising from arbitrage risk and find the existence of abnormal returns which is robust to the use of various portfolios constructed by re-sampling the observations through multiple approaches (e.g., by market capitalization and by book-to-market ratio). Lastly, we reconstruct our portfolios by considering the unique nature of the Chinese stock market (e.g., the dominance of individual investors). Our trading strategies again successfully obtain abnormal returns, suggesting that arbitrage risk can be useful to construct effective investment portfolios in China.
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