Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets

56 Pages Posted: 23 Mar 2013

See all articles by Vladimir Filimonov

Vladimir Filimonov

Swiss Federal Institute of Technology Zurich (ETH Zurich)

David Bicchetti

United Nations - Conference on Trade and Development (UNCTAD)

Nicolas Maystre

UNCTAD - United Nations Conference on Trade and Development; Department of Economics - University of Geneva

Didier Sornette

Risks-X, Southern University of Science and Technology (SUSTech); Swiss Finance Institute; ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Tokyo Institute of Technology

Date Written: March 20, 2013

Abstract

We propose a novel index of short-term endogeneity (or reflexivity) derived by calibrating the Hawkes self-excited conditional Poisson model on empirical time series of trades. The Hawkes model accounts simultaneously for the co-existence and interplay between the exogenous impact of news and the endogenous mechanism by which past trading activity may influence future trading activity. Technically known in the mathematical literature on branching processes as the branching ratio, the reflexivity index is quantified for several commodity futures markets (corn, oil, soybean, sugar, and wheat) and also for a benchmark equity futures market (E-mini S&P 500). Specifically, the reflexivity index is the average ratio of the number of price moves that are due to endogenous interactions to the total number of all price changes, which also include exogenous events. We find an overall increase of the level of short-term endogeneity since the mid-2000s to October 2012, with a typical value nowadays around 0.6–0.7, implying that at least 60–70 per cent of commodity price changes are now due to self-generated activities rather than novel information. Our robustness tests show that the branching ratio provides a ‘pure’ measure of endogeneity that is independent of the rate of activity, order size, volume or volatility.

We complement our analysis by relating the endogeneity dynamics of these futures markets to their price dynamics, particularly around the commodity bubble that developed since 2006 and culminated in mid-2008. While our index does not have a long-term memory, interestingly, we find that it can still provide some interesting insights when the mechanisms working at longer time scales cascade down to shorter terms.

Keywords: Commodities, endogeneity, reflexivity, branching processes, bubble, oil, regime shift, self-excitation

JEL Classification: G10, G12, G13, G14, O33

Suggested Citation

Filimonov, Vladimir and Bicchetti, David and Maystre, Nicolas and Sornette, Didier, Quantification of the High Level of Endogeneity and of Structural Regime Shifts in Commodity Markets (March 20, 2013). Available at SSRN: https://ssrn.com/abstract=2237392 or http://dx.doi.org/10.2139/ssrn.2237392

Vladimir Filimonov (Contact Author)

Swiss Federal Institute of Technology Zurich (ETH Zurich) ( email )

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Zurich, CH-8092
Switzerland

David Bicchetti

United Nations - Conference on Trade and Development (UNCTAD) ( email )

Palais des Nations
Office E 10025
Geneva, 1211
Switzerland

Nicolas Maystre

UNCTAD - United Nations Conference on Trade and Development ( email )

Palais des Nations
Room: E 10028
Geneva, 1211
Switzerland
+41229171848 (Phone)

Department of Economics - University of Geneva ( email )

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Geneva 4, CH-1211
Switzerland

HOME PAGE: http://www.unige.ch/ses/dsec/staff/faculty/Maystre-Nicolas.html

Didier Sornette

Risks-X, Southern University of Science and Technology (SUSTech) ( email )

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055
China

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

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Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Tokyo Institute of Technology ( email )

2-12-1 O-okayama, Meguro-ku
Tokyo 152-8550, 52-8552
Japan

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