The Integration of Oil Futures Contracts with Other Commodities

Abstract

Oil as a commodity has played an important role for the world economies. In this regard futures market has played an important role as the traders have developed important hedging techniques using these contracts. Hence, the policy makers of various governments and the central banks of different countries constantly monitor this commodity and study its corresponding impact on fundamental macroeconomic variables. In addition, the political factors superimpose themselves in such a manner that in some instances the macroeconomic factors are overshadowed by these developments. We have used daily data from the Futures Industry Institute to disentangle the economic news and the political factors in order to develop an understanding of how these factors affect Oil price. Methodology developed by Johansen is used to test for cointegration amongst the variables. Further, the new information causes protracted volatility, accompanied by persistence of volatility reflecting changes in traders' incentive and motivation to trade. Hence, in this study, a nonparametric measure of volatility is employed to develop deeper understanding of the role that volatility plays from the point-of-view of the traders. The results of the study show a high level of co-integration between Oil Futures, Soft Commodities (SC), Grains and Oil Seeds (GO), and Live Stock (LS). Investors may be able to use futures positions on SC, GO, and LS to hedge against Oil Future holdings in the short run. Assets that lacked co-integration with Oil Futures may be useful to those investors seeking to diversify their portfolios. The results of this study ca.