A Speculative Efficiency Analysis of the London Metal Exchange in a Multi-Contract Framework

  •  Sascha Otto    


We analyze the speculative efficiency of the six base metals traded at the London Metal Exchange (LME) for the post-Tin Crisis period from 1991-2008. Especially the influence of different futures contracts on the one side and different underlyings on the other side provides economic insights for market participants like hedgers and speculators. We focus on the 3-month and 15-month futures contracts for all six base metals and conduct single-contract test for every base metal applying an ARMA process. This system is expanded to the multi-contract case, modeling the forecast error as an ARMAX process, where we analyse the interaction of 3-months and a 15-month futures contracts for a single market and the interaction of all six base metals. We find a strong influence of the 3-month futures contract on the 15-month futures contracts. Market participants trading the 15-month contracts should therefore consider the information provided by the 3-month futures contracts.

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