International Commodity Prices and the Australian Stock Market

Transcription

1 Internatonal Commodty Prces and the Australan Stock Market Chrs Heaton, George Mlunovch and Anthony Passé-de Slva Abstract We propose a method for estmatng the earlest tme durng the tradng day when overnght nformaton s reflected n domestc share prces, and use t to measure the mpact of nternatonal commodtes on four Australan Securtes Exchange (ASX) ndces. Whle evdence s found that the ASX openng prce does not fully reflect overnght news, ths nformaton s absorbed wthn 15 mnutes of the openng tme. Usng approprately constructed returns we fnd commodtes to have a statstcally sgnfcant and economcally meanngful effect on the ASX. Nevertheless, the S&P 500 ndex appears to be a more sgnfcant contrbutor of relevant overnght nformaton. Keywords and phrases: Australan Securtes Exchange, Commodtes, Internatonal Spllovers JEL: G14, G15, C52 Department of Economcs, Macquare Unversty, North Ryde, NSW, 2109, Australa, Tel: (+61-2) , Emal: cheaton@efs.mq.edu.au. Department of Economcs, Macquare Unversty, North Ryde, NSW, 2109, Australa, Tel: (+61-2) , Emal: gmlunov@efs.mq.edu.au. JP Morgan Australa. Emal: anthony.g.passede.slva@jpmorgan.com. 1

2 I. Introducton The sgnfcance of the mnng and agrcultural ndustres for overall economc actvty n Australa s well known and long standng. These ndustres also play an mportant role on the Australan Securtes Exchange (ASX), representng between 25 and 30 percent of the ASX captalsaton. Although several domestcally produced commodtes are traded on the Sydney Futures Exchange, major commodty prces are set n large nternatonal markets. Surprsngly, however, there are few studes that nvestgate the mpact of globally determned commodty prces on the ASX lsted frms 1. In ths paper we nvestgate the extent of overnght dependence of the ASX returns on three nternatonal commodty ndces: energy, metals, and agrculture, whch we construct from 29 commodtes traded n the US, the UK and Canada. In order to control for the effect of overnght economy wde news we also nclude the S&P 500 market-wde ndex as an explanatory varable. We propose that the degree of dependence of the Australan share market on overnght commodty news s best measured usng an ASX prce that s nearest n tme to the openng prce, but whch reflects all overnght nformaton avalable at the ASX openng tme. If the presence of market frctons mples that the openng ASX prce does not nstantly and fully reflect the backlog of overnght nformaton, we may underestmate ts degree of dependence usng the offcal openng prce. Recent evdence of stckness n the openng prces of major share markets has been reported n Baur and Jung (2006) and 1 Internatonal studes of lnkages between equty and commodty prces typcally fnd weak lnks see for example Gorton and Rouwenhorst (2006) and Hller, Daper and Faff (2006). In the Australan context, t has been shown that ol (Chaudhr and Smle, 2004) and gold (Chan and Faff, 1998) sgnfcantly affect the ASX. Stll lttle s known about the mpact other types of nternatonal commodtes have on the Australan share market. The effect of nternatonal commodty prces on the Australan dollar s studed n Chen and Rogoff (2002). 2

3 Mlunovch and Thorp (2007). To elmnate the possblty of ths downward bas we dentfy the earlest pont n tme, to the nearest 15 mnutes, when the ASX share prce fully reflects nformaton that has accumulated overnght from outsde sources. The ASX prce recorded at ths pont n tme s called the full-absorpton prce. Once a full absorpton tme s dentfed we calculate overnght domestc returns, defned as log dfferences between the daly full absorpton prce and the prevous day s closng prce. We then regress these overnght ASX returns on the prevous calendar day day-tme (close-open) commodty returns. Snce the ASX closng prce used n ths calculaton s known at the pont n tme when the North Amercan and UK commodty markets start tradng, the R 2 from these equatons can be used as an estmate of dependency of the ASX full-absorpton prce on the overnght commodty news. Conceptually our approach resembles the early studes of the sgnfcance of overnght foregn nformaton n nternatonal stock markets, such as Becker at el. (1990, 1992), and Hamao et al. (1990). These papers decompose daly (close-close) returns nto overnght (close-open) and daytme (open-close) returns, and demonstrate that the mpact of overnght foregn nformaton perssts nto the tradng day beyond the ntal openng tme of the domestc market. The sgnfcance of calculatng openclose and close-open returns, was also hghlghted by Martens and Poon (2001), and Burns, Engle and Mezrch (1998). These authors show that studes of market lnkages can be sgnfcantly based by non-synchronous tradng problems and overlappng measurement of returns. Our study extends ths lterature by developng a more robust hgh frequency econometrc method, and ncorporates nformaton spllovers across dfferent asset classes. 3

4 Ths paper proceeds as follows: Secton II explans the econometrc methodology employed, whle n Secton III we dscuss the data set used. Secton IV contans emprcal results, and Secton V concludes. II. Econometrc Method and Data Let S, t = 1,..., T; = 0,...,24 represent the value of an ASX stock ndex tme perods t after the openng tme on day t, and measured n 15 mnute ntervals. Also let X t t = 1,..., T be a 4 1 vector of overnght returns on three nternatonal commodty prce ndces (Agrculture, Metals and Energy), as well as the S&P 500 ndex. Snce the US and the UK commodty markets open after the close of the ASX, and close before the next tradng day begns on the ASX, X t 1 s known at the start of the tradng day t on the ASX. The frst step n our emprcal approach s to dentfy the full-absorpton tme when all overnght nformaton s reflected n the ASX prces. In order to do ths we form a system of seemngly unrelated (SUR) regresson equatons as follows: ln S ln S = α + β X + η for = 1,...,24; t = 1,..., T (1) ' t, t, -1 t 1 t where α s a scalar constant, β s a ( 4 1) coeffcent vector, and η t s a zero-mean error term. Ths set of 24 equatons s augmented wth one more regresson: ln S ln S = α + β X + η ' t,0 t 1, M 0 0 t 1 0t (2) whch models the varaton n the offcal openng ndex value. The ASX operates a "pre-open" perod from 7am to 10am each tradng day, durng whch orders may be placed, but no trade takes place. Stocks wth codes from A-B start tradng at around 10:00:00am; stocks wth codes from C-F start tradng at around 10:02:15am, and so on. The last group of stocks to commence tradng are 4

5 stocks wth codes from S-Z, whch start tradng at around 10:09:00am 2. The ASX calculates an openng prce from the set of overlappng pre-open buy and sell bds, whch mnmses the absolute value of the excess demand 3. If ths process works effcently, then the openng prce wll reflect all the nformaton about overnght commodty returns, and the subsequent nformaton shocks wll be uncorrelated wth overnght nformaton. In that case β = 0 for = 1,..., M n Equaton (1). If the process s neffcent, however, β wll be non-zero for some low values of, and wll then become zero for hgher values of as the Australan share prces ncorporate all overnght news. We defne to be the smallest value of for whch β = 0 when >. In ths case represents a pont n tme followng the offcal ASX openng tme, after whch the overnght news loses relevance for the subsequent ASX share returns. A naïve approach to determnng the mpact of overnght commodty news on an ASX stock prce ndex would be to regress the ASX close-open return on overnght commodty returns. That s, to estmate Equaton (2). However ths approach assumes that the openng prce of the ASX ndex fully reflects the mpact of overnght news from commodty markets, and s therefore potentally msleadng. A more general approach, whch we pursue n ths paper, s to frst dentfy, and then estmate ln S ln S = α + β X + ε (3) t, ' t-1, M t 1 t where α = α, = 0 β = β and ε = 0 t = ηt. = 0 2 See 3 See 5

6 Selecton of the Full-Absorpton Tme Clearly the choce of s crtcal. If too low a value s chosen for, then the OLS estmator of the mpact of overnght commodty returns s lkely to be based downward. On the other hand, f too hgh a value s chosen, then the OLS estmator of the mpact of overnght commodty returns wll generally be neffcent. Ths s most easly understood n the case where the ntra-daly returns are assumed serally uncorrelated. In ths case, whenever j > j ˆ ' ( ) ( ) ( ) ( ) 1 ' 1 ˆ j = t t 1 E t 1 t 1 > t t 1 E t 1 t 1 = var β var η X X X var η X X X var β (4) = 0 = 0 where ˆ β s the OLS estmator of β for = 0,...,24. Ideally, a consstent estmator of should be used snce ths provdes a largesample ratonale for the two-step procedure of estmatng and then consstently estmatng the parameters n Equaton (3). To ths end, we propose that be estmated usng standard model selecton technques. For a gven value of t, Equatons (1) and (2) form a seemngly unrelated regresson (SUR) model wth 25 equatons (6 hours of tradng dvded nto 15 mnute ntervals, plus the prevous-day-close to current-day-open tme nterval). A gven value of mples a set of restrctons on the SUR model ( 0 for ) β = >. Furthermore, the sequence of restrctons correspondng to = 0,...,24 generates a sequence of nested models. Consequently, the problem of choosng corresponds to the problem of choosng the correct model from a set of M nested models. A standard approach to model selecton problems of ths type s to choose the model that mnmses the Schwarz Crteron SC(). An advantage of ths approach s that ˆ = arg mn SC( ) s a consstent estmator of n {1,..., M} the sense that ( ˆ t P ) lm = = 1. Once the estmate of s computed, we estmate 6

7 Equaton (3) by OLS. The effcency of OLS n ths case s explaned by Greene (2003, p.357). The estmator of β provdes a measure of the full mpact of overnght commodty returns on the stock ndex. Snce the R 2 from Equaton (3) quantfes the proporton of the full-absorpton prce varaton that s explaned by overnght commodty news t provdes a useful measure of the lnear dependence of the ASX share prce ndces on the vector of nternatonal commodty returns. III. Dataset We use 15 mnute data on four ASX ndces: Materals (XMJ), Industrals (XNJ), Energy (XEJ) and the market-wde S&P/ASX 200 ndex (XJO), coverng the perod 21 July 2003 to 31 December 2009 (1633 tradng days). Gven that the tradng day for the ASX starts at 10:00am and fnshes at 4:00pm n Sydney, the 15 mnute samplng frequency yelds 25 observatons each tradng day, ncludng the openng prce. The share prce ndces used here are market captalsaton weghted and nclude ASX lsted companes that qualfy for ncluson n the S&P ASX 200 share prce ndex. The data on commodty prces conssts of the openng and closng prces of spot and nearest-to-expry commodty futures contracts traded n the nternatonal commodty markets. In total we collect prces from ten commodty exchanges ncludng the Chcago Mercantle Exchange, the New York Mercantle Exchange, the New York Board of Trade, the London Internatonal Fnancal Futures Exchange, and the London Metals Exchange. A full account of the commodty exchanges used n ths paper s provded n Table A.1 of the Appendx, together wth a lst of the commodtes that we consder and bref descrptons of the contract. Usng the 7

8 commodty contracts presented n Table A.1 we construct three equally weghted 4 commodty returns ndces that correspond wth agrcultural, metals and energy commodtes. Daytme returns are also calculated for S&P 500 market-wde ndex and ncluded n each regresson equaton n order to control for the mpact of macroeconomc shocks. The ASX ndex data and exchange rates are provded by Srca, and nternatonal commodty prces are sourced from Bloomberg. All returns are denomnated n Australan dollars; Table 2 presents the usual summary statstcs. Table 1: Summary Statstcs for the perod July December 2009 Mean Medan Standard Devaton Skewness Excess Kurtoss ASX XEJ (Energy) ASX XJO (S&P/ASX 200) ASX XMJ (Materals) ASX XNJ (Industrals) Internatonal Agrculture Internatonal Metals Internatonal Energy S&P Summary statstcs are presented for overnght returns, ln(open[t] close[t-1]), for the Australan ndces and day-tme returns, ln(close[t] open[t]), for the nternatonal portfolos. As the above table shows all four ASX ndces recorded a postve average overnght return over the sample perod. The XMJ (Materals) ndex exhbted the hghest average growth rate, but also the hghest level of volatlty. The four ndces exhbt negatve skewness and kurtoss n excess of 3, suggestng the presence of nonnormalty n the data. Of the four nternatonal ndces the metals ndex has shown the hghest rate of growth, whle the nternatonal energy ndex underperformed wth a negatve average return over the sample perod. The negatve growth rates present n the table are due to negatve returns on the USD and GBP recorded over the sample perod. Wth the excepton of the energy varable, the foregn ndces exhbt negatve skewness and excess kurtoss ndcatve of non-normalty n the return seres. 4 Equally weghted commodty ndces are also used n Bode and Rosansky (1980), Fama and French (1987), and Gorton and Rouwenhorst (2006). 8

9 IV. Emprcal Results The SC mnmsaton procedure explaned n Secton II produced ˆ = 1, for each of the four ASX ndces. That s we estmate that the earlest tme at whch all overnght commodty nformaton s reflected n the ASX ndex s 10:15am. Usng these estmates of the full absorpton tme we then estmate Eq. (3) for each ASX ndex and present the results n Table 2 below. Table 2: Impact of overnght commodty news on close- full-absorpton returns. INTERNATIONAL COMMODITIES DEPENDENT î VARIABLES Metals Agrculture Energy S&P 500 S&P/ASX200 (XJO) ASX XEJ (Energy) ASX XMJ (Materals) ASX XNJ (Industrals) (0.112) (0.032) (0.280) (0.213) (0.221) (0.791) (0.175) (0.169) î corresponds to a pont n tme (n 15 mnute ntervals) followng the offcal openng prce when overnght news s reflected n ASX prce, thus ˆ = 1 corresponds to 15 mnutes after the offcal openng tme. P-values are reported n brackets. s the coeffcent of determnaton for the regresson wth S&P500 excluded, whle s the coeffcent of determnaton for the regresson n whch the dependent close- full-absorpton return varable has been replaced by the close- offcal open return. As Table 2 llustrates, overnght commodty returns have a statstcally sgnfcant effect on the ASX full absorpton prces. However, not all commodtes matter, and not all sectors of the ASX are equally affected. Furthermore, as the shows droppng the S&P 500 market-wde ndex from the regressons sgnfcantly reduces the explanatory power of the model. The S&P/ASX 200 (XJO) ndex does not appear to be strongly related to the nternatonal commodtes markets. The explanatory power of the model of 52 percent s reduced to only 2 percent when the S&P 500 s excluded from the regresson. The only statstcally sgnfcant commodty n the ASX 200 equaton s the ndex 9

10 comprsng nternatonal energy commodtes. Judgng by the value of 49 percent, whch measures the explanatory power of the model for the offcal openng prce, ths ndex absorbs nternatonal news relatvely quckly, wth only 3 percent of the full-absorpton prce remanng to be explaned over the next 15 mnutes of tradng. Not surprsngly nternatonal energy prces are statstcally sgnfcant n the ASX energy ndex (XEJ) equaton. Two other sgnfcant explanatory varables are the nternatonal metals ndex and the S&P 500 ndex, whch tself accounts for 24 of the total 39 percent explanatory power of the model. The XEJ ndex appears to be less effcent than the ASX 200. Only 19 percent of the ndex value s explaned at the offcal openng tme compared to 39 percent at the full-absorpton tme recorded 15 mnutes past the openng tme. Internatonal metals and energy prces, as well as the S&P 500 ndex have a statstcally sgnfcant mpact on the ASX Materals ndex (XMJ). When the S&P 500 s excluded from the regressons the commodty prces account for around 9 percent of the varaton n the ASX Materals ndex, compared to 44 percent explaned by the full set of explanatory varables. The XMJ ndex absorbs overnght news quckly, wth about 42 percent of the total 44 percent of the full-absorpton prce explaned at the offcal openng tme. The only relevant source of overnght news for the ASX Industral (XNJ) ndex appears to be the S&P 500; none of the three nternatonal commodty ndces seem to be statstcally sgnfcant at any conventonal level. Ths s confrmed by the value of 0.01, whch measures the explanatory power of the model that excludes the S&P 500 return from the set of explanatory varables. The XNJ ndex s relatvely neffcent n absorbng the overnght news, wth only 33 of the total 49 percent of the 10

11 model s explanatory power acheved at the offcal openng prce, wth the remanng 16 percent accomplshed over the next 15 mnutes. As a fnal llustraton of the nformaton absorpton processes uncovered here, n Fgure 1 we plot the two statstcally sgnfcant regresson coeffcents for the ASX 200, wth varyng across 15 mnute ntervals from 10am to 4pm. Fgure 1: Parameter evoluton over the course of a tradng day 0.08 Impact of Energy on ASX Impact of S&P 500 on ASX :00 10:15 11:30 12:30 13:30 14:30 15:30 16: :00 10:15 11:30 12:30 13:30 14:30 15:30 16:15 Plots are provded for those parameters that are statstcally sgnfcantly dfferent from zero at a 5% sgnfcance level n Table 2. Plots for remanng equatons are avalable upon request. The graphs llustrate how the overnght news absorpton process takes place, wth the regresson coeffcents convergng rapdly (wthn 15 mnutes of the openng tme) to ther true values at the full absorpton tme, and hover around the true values for the remander of the day. V. Conclusons We nvestgate the extent of dependence of Australan share market ndces on overnght nternatonal commodty news. To account the possblty of market neffcences we develop a method for determnng the length of tme, followng the market s offcal openng tme, that the domestc market takes to fully reflect relevant nformaton generated n nternatonal markets overnght, whle the domestc market was closed. 11

12 We fnd some evdence of stckness n the ASX openng prce, n the sense that most of the reacton to overnght stock returns occurs after the market has opened. However, the market appears to be quck n processng ths nformaton and the full-absorpton of nformaton s accomplshed wthn the frst 15 mnutes of tradng. When usng the approprately constructed full absorpton returns, we fnd that overnght commodty returns have a statstcally and economcally sgnfcant mpact on the ASX lsted frms. The most mportant nternatonal commodtes are metals and energy, and the most affected sectors are ASX Energy and ASX Materals. In the case of the ASX Energy ndex the overnght news s responsble for approxmately 39 percent of the varaton n the full-absorpton prce, wth only 15 percent accounted for by the nternatonal commodty varables. Internatonal metals and energy prces have a statstcally sgnfcant mpact on the ASX Materals explanng 9 percent of ts fullabsorpton prce. When the overall ASX 200 market ndex s consdered, the commodtes account for 2 of the total 52 percent of the model s explanatory power, whle n the case of the ASX Industrals of the total 49 percent of the explanatory power 1 percent s accounted for by the nternatonal commodty news. Whle our results provde some support for the clam that the Australan market s commodty based, they also put ths clam n perspectve: the regresson coeffcents on nternatonal commodty returns are consderably smaller than the coeffcents correspondng to the S&P 500. Ths suggests that other factors play an mportant role n determnng the response of the ASX to overnght nformaton. Future research n ths area may apply a smlar methodology to other market ndces and other types of foregn news. An nterestng extenson would account for nformatonal spllovers that arse from ether postve or negatve news shocks. 12

13 References Baur, D. and Jung, R.C. (2006), Return and volatlty lnkages between the US and the German stock market, Journal of Internatonal Money and Fnance, 25(4), Becker, K. G., Fnnerty, J. E. and Gupta, M. (1990), The Internatonal Relaton Between the US and the Japanese Stock Markets, Journal of Fnance 45(4), Becker, K. G., Fnnerty, J.E. and Tucker, A.L. (1992), The Intraday Interdependence Structure Between U.S. and Japanese Equty Markets, Journal of Fnancal Research 15(1), Bode, Z. and Rosansky, V., (1980), Rsk and Return n Commodty Futures, Fnancal Analysts Journal, 36, Burns, P., Engle, R. F. & Mezrch, J. (1998), Correlatons and Volatltes of Asynchronous Data, Journal of Dervatves 5(4), Chan, H. and Faff, R. (1998), The senstvty of Australan ndustry equty returns to a gold prce factor, Accountng and Fnance, 38, Chen, Y. and Rogoff, K. (2002), Commodty Currences, Journal of Internatonal Economcs, 60(1), Chaudhur, K. and Smles, S. (2004), Stock market and aggregate economc actvty: evdence from Australa, Appled Fnancal Economcs, 14(2), Fama, E. F. and French, K. R., (1987), Commodty Futures Prces: Some Evdence on Forecast Power, Premums, and the Theory of Storage, Journal of Busness, 60, Gorton, G. and Rouwenhorst, K.G. (2006), Facts and Fantases about Commodty Futures, Fnancal Analysts Journal, 62(2), Greene, W.H. (2008), Econometrc Analyss, Sxth edton, Upper Saddle Rver: Prentce Hall. Hamao, Y., Masuls, R.W. and Ng, V. (1990), Correlatons n Prce Changes and Volatlty Across Internatonal Stock Markets, Revew of Fnancal Studes 3(2), Hller, D., Draper, P. and Faff, R. (2006), Do Precous Metals Shne? An Investment Perspectve, Fnancal Analysts Journal, 62(2), 98:106. Martens, M. and Poon, S. (2001), Returns Synchronzaton and Daly Correlaton Dynamcs Between Internatonal Stock Markets, Journal of Bankng and Fnance, 25(10), Mlunovch, G., Thorp, S., (2007) "Measurng Equty Market Integraton Usng Uncorrelated Informaton Flows: Tokyo, London and New York", Journal of Multnatonal Fnancal Management, 17(4),

14 Table A.1: Lst of commodtes Appendx Commodty Market Commodty Group Contract Detals Soybeans CBOT Agrcultural Contnuous Futures (nearest to expry) Oats CBOT Agrcultural Contnuous Futures (nearest to expry) Rough Rce CBOT Agrcultural Contnuous Futures (nearest to expry) Corn CBOT Agrcultural Contnuous Futures (nearest to expry) Wheat CBOT Agrcultural Contnuous Futures (nearest to expry) Feeder Cattle CME Agrcultural Contnuous Futures (nearest to expry) Lean Hogs CME Agrcultural Contnuous Futures (nearest to expry) Lve Cattle CME Agrcultural Contnuous Futures (nearest to expry) Lumber CME Agrcultural Contnuous Futures (nearest to expry) Hgh-Grade COMEX Metal Contnuous Futures (nearest to expry) Gold COMEX Metal Contnuous Futures (nearest to expry) Slver COMEX Metal Contnuous Futures (nearest to expry) Sugar No. 11 NYBOT Agrcultural Contnuous Futures (nearest to expry) Crude Ol NYMEX Energy Contnuous Futures (nearest to expry) Natural Gas NYMEX Energy Contnuous Futures (nearest to expry) Palladum NYMEX Metal Contnuous Futures (nearest to expry) Platnum NYMEX Metal Contnuous Futures (nearest to expry) Wheat KCBOT Agrcultural Contnuous Futures (nearest to expry) Canola WCE Agrcultural Contnuous Futures (nearest to expry) Western WCE Agrcultural Contnuous Futures (nearest to expry) Brent Crude ICE Energy Contnuous Futures (nearest to expry) Sugar LIFFE Agrcultural Contnuous Futures (nearest to expry) Wheat LIFFE Agrcultural Contnuous Futures (nearest to expry) Alumnum LME Metal Offcal Cash Market Prce Copper LME Metal Offcal Cash Market Prce Lead LME Metal Offcal Cash Market Prce Nckel LME Metal Offcal Cash Market Prce Tn LME Metal Offcal Cash Market Prce Znc LME Metal Offcal Cash Market Prce The followng abbrevatons are used n the above table: CBOT stands for the Chcago Board of Trade, CME s the Chcago Mercantle Exchange, COMEX the New York Commodtes Exchange, NYBOT the New York Board of Trade, NYMEX the New York Mercantle Exchange, KCBOT the Kansas Cty Board of Trade, WCE the Wnnpeg Commodtes Exchange, ICE the Intercontnental Exchange, LIFFE the London Internatonal Fnancal Futures Exchange, and LME the London Metal Exchange. 14