An Empirical Study On The Term Structure Of China 's Nonferrous Metals Futures Market

The term structure of futures prices is to measure the relationship between the futures price of different maturities and the spot price, which has very important implications for hedgers, investors and rule-makers. Keynes (1930) put forward the the normal backwardation theory, stating that the stock holder is short on the futures market and needs need to get a certain amount of risk premium for the compensation of the price volatilities, thus, the spot price is generally higher than the futures price. In1939, Kaldor proposed the storage theory to further enrich the term structure theory, which is able to explain the phenomenon of the coexistence of contango and backwardation in the futures market. With the prolonged term developed in the market, the preferred habitat theory was introduced; indicating that people involve themselves in different maturities of futures according to their respective economic needs. Past research have been done, both abroad and domestically, on the futures market of agricultural products, industrial metals, precious metals, energy futures regarding their term structures and found that the spot price was able to explain most of the volatility of futures prices. After taking consideration of the convenience yield, long-term equilibrium price and interest rates etc., the performance of the model is sometimes better.Based on the short-term characteristic of nonferrous metals in SHFE, this paper will not consider the drift effect, but assume the spot price follows the mean reversion motions. A state space model is converted from the single factor model, so that the kalman filters and the maximum likelihood can be used to solve the parameters and unobservable variable. The empirical results show that the price of copper futures of China’s non-ferrous metals futures market exhibits significant mean reversion phenomenon, while aluminum and zinc futures contracts demonstrate otherwise. Also, the short-term contracts revert to the mean more strongly than the long-term contracts. Similar study has been done on the three metals futures on the LME and found no significant mean reversion characteristics. Therefore, the domestic non-ferrous metal futures market exhibit different term structure than the London market.This paper attempts to dig the special structure and agent in China’s non-ferrous metal futures market, and employ the disposition effect of behavioral finance to explain the mean reversion of copper futures price. The disposition effect in the futures market that is found in this paper pioneers the domestic study in this field, and laid a foundation for future scholars to further explore the term structure of China’s futures market.