Analysis of EEMD-based quantile-in-quantile approach on spot- futures prices of energy and precious metals in India. (October 2020)

• Record Type: Journal Article
• Authors: Junior, Peterson Owusu; Tiwari, Aviral Kumar; Padhan, Hemachandra; Alagidede, Imhotep
• Is Part Of: Resources policy. Volume 68(2020)
• Publication Date: 2020-10
• Subjects: Spot market -- Futures market -- Ensemble empirical mode decomposition (EEMD) -- Decomposition-based quantile-in-quantile regressions (QQR); G13 -- C32 -- C50 -- Q42; Mines and mineral resources -- Periodicals; Ressources minérales -- Périodiques; Ressources naturelles -- Gestion -- Périodiques; Environnement -- Politique gouvernementale -- Périodiques; 333.8
• DOI: 10.1016/j.resourpol.2020.101731
• Languages: English
• ISSNs: 0301-4207

Abstract

Abstract: By using the daily data for spot and future prices for India, we examine the frequency-dependent asymmetric relationship between futures and spot markets of crude oil, gold, and natural gas (GON). We use the novel asymmetric, noise-reducing frequency-domain EEMD-based quantile-on-quantile regression (QQR) technique. We contribute to the literature on the Indian commodity market by performing the analysis in a noise-free frequency-varying asymmetric framework where dynamic hedging and portfolio diversification is possible. The study appeals to the nature of market dynamics as well as to different investor risk and reward preferences. The empirical results show that both QR and QQR are able to adequately capture the asymmetric link between GON spot and futures prices across the short-, medium-, and long-terms. It also allows ranging from weak to very strong dependencies albeit both negative and positive across different quantiles. Specifically, we find that hedging strategies are feasible in the medium-terms and long-terms of crude oil returns at all quantiles above 0.05. Moreover, our results also show that natural gas and gold futures can only be a weak hedge for a spot in the short-term, but not in the medium-terms and long-terms. The policy implications are also discussed from the findings. Highlights: Asymmetric lead-lag relation between spot and futures prices. The Ensemble Empirical Mode Decomposition (EEMD) technique and Quantile-in-Quantile Regression (QQR) is used. Asymmetric link between Gold, Crude Oil, and Natural Gas spot and futures prices across the short-term, medium-term, and long-terms. Hedging strategies are feasible in the medium-terms and long-terms for Crude Oil returns at all quantiles above 0.05. Natural Gas and Gold futures can only be a weak hedge for spot in the short-term but not in the medium-terms and long-terms.