Research On Affine Term Structure Model Of Copper Futures Prices In China

After the stock market crash in2008, Chinese investors have become more carefultowards investment on the securities market, and meanwhile have been looking forother investment opportunities. The development of the futures market attracts manyinvestors with the advanced trading system, such as two-way transaction, T+0tradingand margin trading. Moreover, the futures market contributes to the smooth operation ofthe existing market, and plays a positive role on the macro-economy, and thus receivesmore attention of the government. However, futures market in China was newly started,and is relatively weak in terms of theory and model with comparation of the westerncountries. The lack of theoretical foundation for the investors and the government hasbeen a bottleneck in the development of futures market in China.Firstly, in this paper the futures theory such as the cost of ownership theory, thenormal backwardation theory and the storage theory is analyzed in the order of thedevelopment of the theories. On the basis of these theories, this study discusses theinfluencing factors and their underlying assumptions. Through mathematical deduction,an affine term structure model is established, and the futures pricing formula isobtained.This study focuses to investigate the relatively mature Shanghai copper futurescontracts, and then data from Shanghai Futures Exchange was analyzed by Eviewssoftware with Kalman filtering method and maximum likelihood estimation method.The empirical results verify that it is more in line with China’s copper futures marketthat the spot price following a mean reverting process. The results suggested thatcompared to the frequently used three-factor model, the model built in this study canbetter fit data. And no matter the goodness of fit of the predicted value and the actualvalue, or day change judgment, the model established in this article has strongpredictive ability. So it would be suitable to the term structure of commodity futures inChina. The same time, a conclusion is got that the risk premium factor as an affinefunction of the state variables is in line with the actual situation, which broke theconsistent assumption of a constant risk premium in the domestic model. Thisconclution has a certain reference value for the domestic future research. This study isof great significance in both theory and reality.