Winter 2019 – old

This article provides a brief update on the many events and initiatives that have taken place since the digest’s last issue, including (a) the appointment of the JPMCC’s Executive Director; (b) the launch of the JPMCC’s Geopolitical Oil Price Risk Index; (c) the Center’s forthcoming newsletters; (d) CU Denver Business School’s expanded commodities curriculum; (e) the Program Director’s recent press interview; and (f) the Research Director’s highly successful international commodities symposium.

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By Jian Yang, Ph.D., CFA, J.P. Morgan Endowed Research Chair, JPMCC Research Director, and Professor of Finance and Risk Management, University of Colorado Denver Business School

In this report, the JPMCC’s Research Director provides updates about the Center’s research activities from January 2019 through August 2019 with the focus on two international commodities conferences organized or co-organized by the Research Director on behalf of the JPMCC. Those conferences, in turn, were the “International Conference on Derivatives Market and Risk Management,” held in Shanghai, China; and the JPMCC’s 3rd Annual International Commodities Symposium, held at the University of Colorado (CU) Denver Business School. Regarding the latter conference, the Research Director especially thanked the CU Denver’s senior leadership team for their support of the JPMCC and its international commodities symposium.

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On March 6, 2019, the JPMCC was honored to host three experts on cryptocurrencies during a panel presentation organized and moderated by the JPMCC’s Program Director, Dr. Yosef Bonaparte. This article recounts the insights of Mr. Bill Sinclair, Dr. Andrei Kirilenko, and Mr. Colin Fenton during their respective presentations.

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By Yosef Bonaparte, Ph.D., JPMCC Program Director and Associate Professor of Finance, University of Colorado Denver Business School

This digest article describes a new research project at the JPMCC: the launch of the Geopolitical Oil Price Risk Index (GOPRX), which is designed to reflect the impact of geopolitics on oil prices, volatility, and supply in one succinct metric.

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By Bluford Putnam, Ph.D., Chief Economist, CME Group and Member of the JPMCC’s Research Council

In this report, the author delves into the longer-term forces of financial panic, disruptive technology, and trade protectionism to understand why the correlation structure among key commodities may occasionally diverge sharply from its longer-term pattern only to return eventually back to form.

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By Gary Mahrenholz, Ph.D., Economist, Office of Enforcement’s Division of Energy Market Oversight, U.S. Federal Energy Regulatory Commission and Vincent Kaminski, Ph.D., Professor in the Practice of Energy Management, Jesse H. Jones Graduate School of Business, Rice University and Member of the JPMCC’s Research Council at the University of Colorado Denver Business School

This paper is the first in a two-part series. In the current paper, the authors review the definition of liquidity, its importance to market practitioners and policymakers and discuss different measures of market liquidity. In the second part of this series, which will be included in the next issue of the GCARD, the authors will review the unique features of the U.S. natural gas market and how price formation occurs for the various types of natural gas products. This paper will also provide an assessment of liquidity in the U.S. natural gas market.

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By Thomas Brady, Ph.D., Executive Director of the JPMCC and Member of the JPMCC’s Research Council at the University of Colorado Denver Business School

This article provides practitioners seeking to value investments across the commodity sector with practical guidance on how to calculate discount rates and importantly, how to communicate these rates to the many disparate stakeholders within and outside of a firm.

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By Lutz Kilian, Ph.D., Senior Economic Policy Adviser, Federal Reserve Bank of Dallas and Member of the JPMCC’s Research Council and Xiaoqing Zhou, Ph.D., Economist, Federal Reserve Bank of Dallas

This digest article discusses how modeling the relationship between oil prices, exchange rates and interest rates raises some interesting identification challenges. Recent research shows how the workhorse structural oil market VAR model may be modified to overcome these challenges. The resulting structural model sheds light on common conjectures about the determinants of the variability of the real exchange rate, the real price of oil, and the U.S. real interest rate. The model estimates provide a more nuanced understanding of historical oil price fluctuations, but substantively agree with earlier historical narratives.

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By John Hua Fan, Ph.D., Griffith Business School, Australia; Adrian Fernandez-Perez, Ph.D., Auckland University of Technology, New Zealand; Ana-Maria Fuertes, Ph.D., Cass Business School, City, University of London, U.K.; and Joëlle Miffre, Ph.D., Audencia Business School, Nantes, France

As summarized by Ana-Maria Fuertes, Ph.D., Professor in Finance and Econometrics, Cass Business School, City, University of London, U.K. and Member of the GCARD’s Editorial Advisory Board

This digest article examines the information content of futures markets speculators’ net positions. The article shows that long-short portfolios based on speculative pressure capture attractive premia in commodity, equity and currency futures markets. The thus formed speculative pressure factors are able to explain the cross-section variation in futures returns after controlling for tradeable (carry, momentum and value) factors and non-tradeable global macroeconomic factors.

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By John Hua Fan, Ph.D. and Tingxi Zhang, Griffith Business School, Australia

As summarized by John Hua Fan, Ph.D., Griffith Business School, Australia

This digest article examines systematic investment strategies in the Chinese commodity futures market. The paper’s results indicate that momentum and term structure strategies generate statistically significant profits across the futures curve, in the most liquid markets and in randomly selected sectors. In addition, the paper presents a head-to-head comparison of the important institutional settings with the U.S. market.

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By Rajkumar Janardanan, Summerhaven Investment Management; Xiao Qiao, Ph.D., Paraconic Technologies US Inc.; and K. Geert Rouwenhorst, Yale School of Management and Member of the JPMCC’s Research Council

As summarized by Xiao Qiao, Ph.D., Paraconic Technologies US Inc. and Member of the GCARD’s Editorial Advisory Board

This digest article examines the behavior of futures prices and trader positions around price limits in commodity futures markets. The authors ask whether limit events are the result of shocks to fundamental volatility or the result of temporary volatility induced by the trading of non-commercial market participants (speculators). The paper finds little evidence that limit events are the result of speculative activity, but instead are associated with shocks to fundamentals that lead to persistent price changes. When futures trading halts, price discovery migrates to options markets, but option prices provide a biased estimate of subsequent futures prices when trading resumes.

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By Hilary Till, Solich Scholar, J.P. Morgan Center for Commodities, University of Colorado Denver Business School; and Principal, Premia Research LLC

This article describes risk premia strategies and notes how commodity risk premia strategies are an extension of ideas that originated in the equity markets. The paper then covers various techniques which attempt to minimize the inevitable losses that can arise from such strategies. The article concludes with several hypotheses on why commodity risk premia strategies have historically earned high average returns and does so by identifying the risk exposures that investors are taking on and for which they need to be compensated.

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By Abhishek Deshpande, Ph.D., Executive Director, Head of Global Oil Market Research & Strategy, J.P. Morgan

This article notes that investors in general remain wary of investing in oil especially if returns are likely to be challenged by the peak demand theory, or low-cost shale production in the medium term, or oil producers shifting their extraction of resources ahead of any pre-announced implementation of climate-based policies. Given the lack of investments in the sector and demand for oil being driven predominantly by non-OECD economies where population growth is on the rise, oil as an asset class could end up providing positive returns. Additionally, geopolitics will always be core to oil at least in the next decade.

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By Adila Mchich, Director, Research and Product Development, CME Group

The nature of price formation in the global Liquefied Natural Gas (LNG) market is increasingly the subject of both industry and academic attention. As the market shows greater appetite to gradually transition from oil indexation towards gas-to-gas pricing, many alternative price references have emerged as regional price signals, reflecting their respective markets. The article examines, from a market microstructure prospective, how a new U.S. business model is altering the structure of LNG trading transactions and subsequently positioning the U.S. to be the most likely anchor for price formation for the global LNG market.

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By Thomas Babbedge, Ph.D., Chief Scientist and Deputy Head of Systematic Strategies and J. Scott Kerson, Senior Managing Director and Head of Systematic Strategies, Gresham Investment Management

In Part 1 of 2, we explore the reduced performance of trend followers over the past decade but fail to find evidence that this is due to the commonly proffered reason of overcrowding of the strategy. Instead we find that the cause can be laid at the feet of the markets themselves – those markets commonly traded by trend followers have simply not trended as strongly in the past decade. In Part 2 we will turn our attention to the “trendiness” of a novel dataset of alternative commodity markets, selected based on a set of simple criteria. This will feature in a forthcoming edition of the GCARD.

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By Vito Turitto, Lead Quantitative Analyst, S&P Global Platts (U.K.)

Managing a commodity portfolio is not particularly easy because commodities markets respond to idiosyncratic features, which cannot be found in equities, nor in the fixed income markets. In fact, their response to changes in the macroeconomic, financial and geopolitical landscapes might considerably differ from one commodity to another. In order to better address these problems, this paper examines four important aspects of commodity portfolio management: (1) commodity market returns; (2) commodity volatilities; (3) commodity seasonal volatility; and (4) trend and mean reversion.

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By Elitza Voeva-Kolev, Market Analyst and Rahul Varma, Associate Director of the Market Intelligence Branch, Division of Market Oversight, U.S. Commodity Futures Trading Commission

This report describes research conducted on entering orders manually and automatically in commodity futures markets in the United States to determine how technological change is affecting futures trading.

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Interview by Hilary Till, Contributing Editor, Global Commodities Applied Research Digest

In this issue of the GCARD, we have the immense privilege of interviewing Blythe Masters, a former senior J.P. Morgan executive, who has distinguished herself as a thought leader and innovator across many disciplines, including in derivatives, commodities, and in digital asset technology.

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