[Copper in a Hybrid Physical-Investment Market]

By

ACKNOWLEDGEMENT

I would take this opportunity to thank my research supervisor, family and friends for their support and guidance without which this research would not have been possible

DECLARATION

I, [type your full first names and surname here], declare that the contents of this dissertation/thesis represent my own unaided work, and that the dissertation/thesis has not previously been submitted for academic examination towards any qualification. Furthermore, it represents my own opinions and not necessarily those of the University.

Signed __________________ Date _________________

ABSTRACT

This paper investigates the short-run returns and volatility spillovers across three major international copper futures markets: London, New York, and Shanghai. The five-minute returns of three-month to maturity copper futures contracts for the London Metal Exchange, the New York Mercantile Exchange, and the Shanghai Futures Exchange are examined. The analysis utilizes the dynamic conditional correlation GARCH (DCCGARCH) model to explore return and volatility relationships. Evidence of bi-directional return and volatility spillovers between the two developed markets of LME and NYME is found only when the NYME operates at the electronic trading system, suggesting that the trading mechanism plays certain roles in the spillover effects in the copper futures markets. In addition, significant bi-directional returns and volatility spillovers between LME (developed market) and SHFE (emerging market) and significant uni-directional volatility spillovers from SHFE (emerging market) to NYME (developed market) are documented. This may suggest that the SHFE market is more integrated into the LME market. Overall, evidence suggests that higher level of market integration and easy access to current trading information make information dissemination faster and establish stronger relations of returns and volatility across the markets.

TABLE OF CONTENTS

ACKNOWLEDGEMENT2

DECLARATION3

ABSTRACT4

Problem Statement5

Purpose of the study6

Importance of the study7

Scope of the study8

Rationale of the study9

Definition of terms10

Overview10

CHAPTER 2: LITERATURE REVIEW12

CHAPTER 3: METHODOLOGY26

Model Specification26

CHAPTER 4: PRESENTATION OF FINDINGS/STATISTICAL ANALYSIS29

Preliminary Data Analysis29

Empirical Results30

CHAPTER 5: CONCLUSIONS & RECOMMENDATIONS32

REFERENCES33

APPENDICES37

CHAPTER 1: INTRODUCTION

Problem Statement

The transmission of information across international equity markets has been investigated extensively. Empirical investigation of this issue has commonly focused on the short-term dynamic relations of returns and volatility across markets. Evidence of bidirectional transmission of returns and volatility between developed equity markets (Engle, 2009, pp 125) and Wu, Li, and Zhang (2010, pp 89) and uni-directional transmission from developed to emerging equity markets (Wongswan, 2006, pp 144) has been documented. However, the transmission of information across commodity markets has received far less attention. Thus, a natural question is whether global commodity markets have the same transmission mechanism as suggested in the equity markets. In this study, we provide empirical evidence on this issue through examining the short-run dynamic relations of returns and volatility across three major copper futures markets: London, New York, and Shanghai. Copper futures contracts have been traded in the London Metal Exchange (LME) and the New York Mercantile Exchange (NYME) for many decades. They are well established. Over the past 15 years, Chinese futures market has experienced tremendous development due to continuous regulatory reforms, and is therefore classified as an emerging futures market. Examining these three markets will provide evidence on ...