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Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets
Vladimir Filimonov
, David Bicchetti
, Nicolas Maystre
, DidierSornette
Dept. of Management, Technology and Economics, ETH Z¨ urich, Z¨ urich, Switzerland 
United Nations Conference on Trade and Development, Division on Globalization and Development Strategies, Palais des Nations, 1211 Geneva 10, Switzerland 
Dept. of Economics, University of Geneva 
Swiss Finance Institute, c/o University of Geneva 
We propose a novel index of short-term endogeneity (or reflexivity) derivedby calibrating the Hawkes self-excited conditional Poisson model on empir-ical time series of trades. The Hawkes model accounts simultaneously forthe co-existence and interplay between the exogenous impact of news andthe endogenous mechanism by which past trading activity may influence fu-ture trading activity. Technically known in the mathematical literature onbranching processes as the branching ratio, the reflexivity index is quanti-fied for several commodity futures markets (corn, oil, soybean, sugar, andwheat) and also for a benchmark equity futures market (E-mini S&P 500).Specifically, the reflexivity index is the average ratio of the number of pricemoves that are due to endogenous interactions to the total number of all pricechanges, which also include exogenous events. We find an overall increaseof the level of short-term endogeneity since the mid-2000s to October 2012,with a typical value nowadays around 0.6–0.7, implying that at least 60–70per cent of commodity price changes are now due to self-generated activitiesrather than novel information. Our robustness tests show that the branchingratio provides a ‘pure’ measure of endogeneity that is independent of the rateof activity, order size, volume or volatility.
Email addresses:
(Vladimir Filimonov),
(David Bicchetti),
(Nicolas Maystre),
(Didier Sornette)
Preprint submitted to UNCTAD discussion papers March 21, 201
We complement our analysis by relating the endogeneity dynamics of these futures markets to their price dynamics, particularly around the com-modity bubble that developed since 2006 and culminated in mid-2008. Whileour index does not have a long-term memory, interestingly, we find that itcan still provide some interesting insights when the mechanisms working atlonger time scales cascade down to shorter terms.
Commodities, endogeneity, reflexivity, branching processes,bubble, oil, regime shift, self-excitation
The opinions expressed in this paper, including designation and termi-nology, are those of the authors and are not to be taken as the official viewsof the UNCTAD Secretariat or its Member States.
We compute the fraction of endogenous trades on highly-traded futuresmarkets.
Similar to equity indices, endogeneity on commodity has grown signif-icantly during the last decade.
Endogeneity averages 0.6–0.7 in 2012: most price changes are not dueto informative news.
Our index is independent of the rate of activity, order size, volume orvolatility.2
1. Introduction
Many commodity prices have experienced roller-coaster rides since themid-2000s. These price gyrations have fueled an intense debate among aca-demics, commodity traders and policymakers. In particular, the role of finan-cial investors has been the subject of considerable controversies. Disagree-ments relate to whether these new actors have improved the price discoveryprocess of commodities futures markets or whether they have made the pro-cess less effective and more unstable.For the proponents of the so-called financialization of commodity mar-kets, its benefits are at least threefold. First, it brings the futures prices of these products closer to their underlying fundamentals. Second, it providesliquidity. Third, it transfers risks to agents who are better prepared to as-sume it (see e.g. Stoll and Whaley (2010, 2011); Irwin and Sanders (2012)and references cited therein). In short, this process supports the efficientmarket hypothesis (EMH) (Samuelson, 1965; Fama, 1970, 1991). By con-trast, other observers argue that financial investors can have negative effectson commodity markets (see e.g. UNCTAD (2009, 2011); Tang and Xiong(2010); Bicchetti and Maystre (2012) and references cited therein).To contribute to this debate, we analyze the microstructure of severalcommodity futures markets at short time scales and provide quantitativedynamic estimates of their significant degree of reflexivity. This provides astrong counter-example to EMH, which predicts in its ideal limit that themarket absorbs in full and essentially instantaneously the flow of informationby faithfully reflecting it in asset prices. A corollary to this strong versionof EMH states that price variations can only result from exogenous eventsthat feed instantaneously the price determination process. In contrast, ourfindings show that past price changes can trigger subsequent price variations,as described qualitatively by Soros’ concept of “market reflexivity” (Soros(1987)).In this paper, we build on Filimonov and Sornette (2012) and we pro-pose estimates about the degree of short-term endogeneity (or reflexivity) of commodity futures markets derived from the Hawkes self-excited conditionalPoisson model. The Hawkes model combines in a natural and parsimoniousway exogenous influences with self-excited dynamics. Indeed, it accountssimultaneously for the co-existence and interplay between the exogenous im-pact of news and the endogenous mechanism of trading activity where oneprice change triggers subsequent price changes. Thus, the Hawkes model3

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