Economic linkages across commodity futures : hedging and trading implications

We investigate cross-market trading dynamics in futures contracts written on seemingly unrelated commodities that are consumed by a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), palladium (PA) and gasoline (GA) futures markets. The automobile industry is responsible for more than 50% of global demand for each of these commodities. VAR estimation reveals short-run cross-market interaction between NR and GA, and from NR to PA. Cross-market influence exerted by PA is felt in longer dynamics, with PA volatility (volume) affecting NR (GA) volume (volatility). Our findings are robust to lag-specification, volatility measure, and consistent with full BEKK-GARCH estimation results. Further analysis, which benchmarks against silver futures market, TOCOM index and TOPIX transportation index, confirms that our results are driven by a common industry exposure, and not a commodity market factor. A simple trading rule that incorporates short-run GA and long-run PA dynamics to predict NR return yields positive economic profit. Our study offers new insights into how commodity and equity markets relate at an industry level, and implications for multi-commodity hedging.

Common industry exposure in seemingly unrelated commodities

We propose and document robust evidence of cross-market return, volatility, and volume interactions among futures contracts written seemingly unrelated commodities exposed to a common industry. On the Tokyo Commodity Exchange, we find such evidence in natural rubber (NR), aluminum (AL) and gasoline (GA) futures markets, which are complementary commodities heavily consumed by Japan's automobile industry. Our VAR results indicate that (i) for shorter dynamics, NR and GA volatility both influence AL volatility; GA volume affects NR volatility and volume; the GA market is immune to both NR and AL trading activities; (ii) for longer dynamics, AL volume affects both NR volume and GA volatility; NR volume influences GA volume. These results are robust to lag-specifications, volatility measures and are consistent with full BEKK-GARCH estimates. Further analysis using the silver contract, TOCOM and TOPIX transportation indices, shows that a commodity market factor cannot explain our result. Our results offer insights into how commodity and equity markets relate at an industry level.

Comparison of static and dynamic engine models on the transient performance of a passenger vehicle powertrain

This paper presents experimental and computational results obtained on the Ford Barra 190 4.0 litres I6 gasoline engine and on the Ford Falcon car equipped with this engine. Measurements of steady engine performance, fuel consumption and exhaust emissions were first collected using an automated test facility for a wide range of cam and spark timings vs. throttle position and engine speed. Simulations were performed for a significant number of measured operating points at full and part load by using a coupled Gamma Technologies GT-POWER/GT-COOL engine model for gas exchange, combustion and heat transfer. The fluid model was made up of intake and exhaust systems, oil circuit, coolant circuit and radiator cooling air circuit. The thermal model was made up of finite element components for cylinder head, cylinder, piston, valves and ports and wall thermal masses for pipes. The model was validated versus measured steady state air and fuel flow rates, cylinder pressure parameters, indicated and brake mean effective pressures, and temperature of metal, oil and coolant in selected locations. Computational results agree well with experiments, demonstrating the ability of the approach to produce fairly accurate steady state maps of BMEP and BSFC, as well as to optimize engine operation changing geometry, throttle position, cam and spark timing. Measurements of the transient performance and fuel consumption of the full vehicle were then collected over the NEDC cycle. Simulations were performed by using a coupled Gamma Technologies GT-POWER/GT-COOL/GT-DRIVE model for instantaneous engine gas exchange, combustion and heat transfer and vehicle motion. The full vehicle model is made up of transmission, driveshaft, axles, and car components and the previous engine model. The model was validated with measured fuel flow rates through the engine, engine throttle position, and engine speed and oil and coolant temperatures in selected locations. Instantaneous engine states following a time dependent demand for torque and speed differ from those obtained by interpolating steady state maps of BSFC vs. BMEP and speed. Computational results agree well with experiments, demonstrating the utility of the approach in providing a more accurate prediction of the fuel consumption over test cycles.

Comparing different economic linkages among commodity futures

Gasoline (GA) and kerosene (KO) are extracted from crude oil (CO), such that the three fuel commodities share a chemical link. On the other hand, GA also shares an industrial link with natural rubber (NR) and palladium (PA) as complementary commodities that are heavily consumed by the automobile industry. We contrast the information content embedded in the two economic linkages. Focusing on TOCOM futures contracts written on the five commodities and centering on GA, we confirm that incremental information provided by either CO, KO or NR, PA over a buy-and-hold strategy and a naive forecast, are both statistically and economically significant. While the chemical link forecast is more profitable, a double-link forecast generated from a VECM with two cointegrating vectors (KO-GA and GANR prices) outperforms both single-link forecasts based on risk-adjusted profit net of transaction costs. Further comparisons against the profitability of commodity-based momentum strategies documented in Erb and Harvey (2006) and Miffre and Rallis (2007) show that the double-link forecast holds its own against the most profitable of the 75 momentum strategies considered. This strongly suggests that not only are there incremental profits to be gained from harnessing and combining economic links among commodity futures, the resultant incremental profits are economically significant against other proven commodity-based trading strategies in the existing literature.

A behavioural study of consumer boycott

This paper studied sales of BP branded gasoline in the United States of America prior, during and after the 2010 BP Deepwater Horizon oil spill accident. The research was funded by the Centre for Sustainable and Responsible Organisations at Deakin University. In what is perhaps the first behavioral study of consumer boycott using market level data, we found that consumers’ with geographic proximity to the accident were more likely to boycott the BP brand. In States that bordered or were close to the Gulf of Mexico, BP sales experienced a small but significant decline as compared to sales in States farther away. The small effect is surprising. We suspect this may be related to the inelastic nature of the product category and the high degree of product homogeneity within the category. It appears that consumers’ and the media’s vocalized outrage over the Deepwater Horizon accident did not result in significant changes in purchase behavior. As such, while consumers were outraged by BP’s actions, they continued to purchase the BP brand. Consumers who lived farther from the spill did not appear to alter their buying patterns even in the short-term, despite being exposed to similar media coverage and high levels of negative public sentiment. In examining changes in BP brand-share with both positive (i.e., claims of success in dealing with the spill) and negative events (evidence that attempts to stop the spill failed), we observed some associations between these events and changes in buying behavior. In States close to the accident, BP purchases increased with good news, market share declined with bad news. No apparent correlation was seen in States that were farther from the accident.

Looking back to move forward: the Dymaxion revisited

In 1933 and 1934 the visionary architect, designer, engineer and philosopher Robert Buckminster Fuller built three prototypes of a car he named the Dymaxion. Regarded as a ground breaking concept vehicle, the Dymaxion is arguably more relevant today than when it was conceived over eighty years ago. Although plans to manufacture were abandoned by Chrysler in 1933, the Dymaxion Car was considered the most fuel-efficient car of its time using less than half the amount of gasoline than any other car on the road. This was due to its meticulous design based on scientific first principles, power weight ratios and the laws of aerodynamics. The Dymaxion was spacious and easy to maneuver; it offered multi purpose use options with the passenger capacity of a modern people carrier and represented Buckminster Fuller's social responsibility mantra to create more with less. The brand narrative of the Dymaxion tells a story of sustainability and practicality that resonates with today's vehicle consumer market. The adage suggesting that there is reason why a car's windshield is bigger than its rear view mirror and implies that what lies ahead is much more important than anything behind you. Although this life metaphor acknowledges the importance of an occasional glace back this paper emphasises the strategic value of a precognitive, retrospective approach to design.

Assembled block copolymer stabilized high internal phase emulsion hydrogels for enhancing oil safety

Accidental spills and subsequent fires during oil storage and transportation periods cause serious damage to environments. Herein, we present a novel route to enhance oil safety by transforming oils into high internal phase emulsion (HIPE) hydrogels. These HIPE hydrogels are stabilized by solvent- or pH-driven assembled block copolymer (BCP), namely poly(4-vinylpyridine)-block-poly(ethylene glycol)-block-poly(4-vinylpyridine) (4VPm-EGn-4VPm). The assembled BCP shows high efficiency to stabilize HIPE hydrogels with a low concentration of 1.0 (w/v) % relative to the continuous aqueous phase. The volume fraction of the dispersed organic phase can be as high as 89% with a variety of oils, including toluene, xylene, blended vegetable oil, canola oil, gasoline, diesel, and engine oil. These smelly and flammable liquids were formed into HIPE hydrogels and thus their safety was enhanced. As the assembly is pH sensitive, oils trapped in the HIPE hydrogels can be released by simply tuning pH values of the continuous aqueous phase. The aqueous phase containing BCP can be reused to stabilize HIPE hydrogels after naturalization. These assembled BCP stabilized HIPE hydrogels offer a novel and safe approach to preserve and transport these smelly and flammable liquid oils, avoiding environmental damage.

Egregiousness and boycott intensity: evidence from the BP Deepwater Horizon oil spill

Consumer boycotts are triggered by egregious events, but the literature has not distinguished the level of egregiousness from consumers’ preferences or disutility associated with a given level of egregiousness, nor has the literature studied how these two components of egregiousness affect boycott intensity. We provide a model of market-level boycotts that distinguishes the two egregiousness components. Consistent with the predictions of our model, the market-level intensity of consumer boycotting of BP-branded gasoline, which was triggered by the BP Deepwater Horizon oil spill, increased with the spill’s egregiousness level, approximated by the officially reported daily amount of oil leaked into the ocean and by other measures (i.e., the duration of the spill and the intensity of media coverage), and with consumers’ disutility from egregiousness, approximated by an area’s environmentalism and its proximity to the Gulf of Mexico.