Disequilibrium in commodity futures markets

The objectives of this research were to (1) determine the level of disequilibrium in commodity futures markets and (2) to determine the factors related to disequilibrium in commodity futures markets. If traders are able to use this information in technical trading strategies, then more skilled trades may be possible. This could result in faster price adjustments in the market, and increased market efficiency. A technical trading model which uses past prices was used to simulate commodity returns from 1960 through 1986, using five well known technical trading systems and seven commodities. These commodities included corn, soybeans, sugar, silver, live cattle, T-Bills, and Deutsche Mark. Significantly above zero trading returns were found for most commodities, therefore rejecting the weak form efficient market hypothesis. A stronger test which adjusted returns for risk by using the capital asset pricing model, also rejected the weak form hypothesis, indicating that short-run disequilibrium theory may better describe commodity markets than the weak form efficient markets hypothesis. Also, trading systems were much higher correlated than commodities, indicating that traders should diversify by trading more commodities rather than trading more systems. Overall, the channel system was found to be the best system to trade, based on its high mean return level, in relation to its variance of returns. However, no single commodity clearly appeared to be the best to trade, based on mean and variance of returns. The null hypothesis that monthly trading returns were normally distributed was rejected for nearly all cases. This was due to high kurtosis levels in the returns. However, stock returns were found to be normally distributed. Price variation was found to be the major factor related to trading returns. As price variation increased, so did trading returns. Mean price levels were also found to be positively related to trading returns, though not quite as strongly as price variation. Trading volume and inflation were not strongly related to returns. Trading returns did not have a statistically significant seasonal pattern. In summary, for commodity futures, evidence favored rejecting the weak form efficient markets theory and instead favored disequilibrium theory, since significant technical trading returns were found