TEMPORAL PRICE BEHAVIOR IN COMMODITY FUTURES MARKETS*

Abstract

THE BEHAVIOR OF COMMODITY MARKETS has been a subject of extended controversy among economists. Much of this controversy revolves around the underlying behavior of futures prices over time. A number of researchers have concluded that there are no systematic patterns to futures price behavior while others maintain that while there may be a priori reasons justifying behavior, the application of certain mechanical filter rules often leads to substantial profits which is indicative of nonrandom behavior. It is likely that professional attention in commodity markets will increase in the future given their current newsworthiness1 along with their similarity to bond markets. Recent contributions by R. Roll [23] and T. J. Sargent [25] emphasize this latter point. In fact, many of the specific theories of commodity price behavior and term structure phenomena between interest rates can be seen as special cases of a more general model of an efficient capital market. This model has also been suggested as a rationalization of the Fisherian relationship between interest rates and price changes [22]. Studies dealing with the underlying mechanism of futures price behavior include, inter alia: Cargill and Rausser [5, 6], Gray [10, 11], Hardy [12], Houthakker [13], Kendall [15], Keynes [16], Labys and Granger [17], Larson [18], Leuthold [19], Mandelbrot [20], Samuelson [24], Smidt [27], Stevenson and Bear [28], and Working [31, 32, 33]. While this list is in no way exhaustive, it does represent the broad range of studies on commodity markets. Much of the above work on commodity markets can be classified in one of three areas. First, numerous attempts [5, 6, 15, 17, 18, 19, 27, 28] have been made to test the so-called random walk model by statistical

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