Implied Information In Term Structure Of Futrues Price And Its Applications

The term structure of futures price refers to the relation between futures price and different maturities at a point. Also the term structure is a representation of the inter-temporal price relationship between futures contracts with different maturities, indicating changes between futures price and spot price over time. It is the comprehensive reaction to all the market information available, also the the investors'comprehensive expect to the future price trend, so it plays an important part to the hedging and price discovering of futures.In recent years, scholars pay more and more attention to the information extraction of financial assets prices. Studies related to this have been involving every field of the financial market, including securities,bonds and futures, but researchs on the term structure of futures price which may contains implied information about investment stratege and hedging still untapped. This paper, therefore, largely studies the term structure of commodity futures price because of the young financial futures relative to the commodity futures in China and no enough data available. We use weekly settlement prices of 9 most representative underlying from Shanghai Futures Exchange(SHFE), Dalian Commodity Exchange(DCE) and Zhengzhou Commodity Exchange(CZCE), covering the period from October 2004 to July 2010, including mental,energy and agricultural. This paper applies principal component analysis(PCA) to the term structure of commodity futures price in China to explore the application value of implied imformation in the term structure of futures price according to the different change of the term structure curve of commodity futures price, mainly including implication of investment stratege and hedging. Findings from principal component analysis of commodity futures price term structures are, the first three principal component(PCs) basically explains the 85% of variance of the dynamic futures price term structures, the first principal components (PCs) derived from our sample of 9 underlyings can be interpreted as level factors, corresponding to the biggest eigenvalue of futures price variance-covariance matrix, reflecting that parallel shift factors play a leading role to the dynamic futures price term structures, so the increase of this factor can lead to increase of all futures contracts; The second PCs represent steepness factors corresponding to the second eigenvalue which are relative to the slope of the term structures curve, so this factor can make short-term and long-term futures contract change in different directions,and therefore change the solpe of the term structures curve; The third PCs, corresponding to the third eigenvalue, can be interpreted as curvature factors which is closely related to the curvature of the term structures curve, so this factor can make mid-term futures move toward opposite direction comparing to short-term and long-term, and therefore change the curvature of the term structures curve.Based on the term structures, we construct three different investment strategies, and the results tell us that even the proflio with low explanatory power of the first PCs can gain excess profits more than basic hold strategy; According to the different changes of the term structure, we can conclude that the term structure make different influence to the decision and risk of hedging.