A dynamic model of hedging and speculation in the commodity futures market.

Over the 1990-2000 time period, a dynamic interaction between spot and futures returns in five commodity markets is empirically validated. An error correction relationship for the cash returns and a non-linear parameterization of the corresponding futures returns are combined with a bivariate CCC-GARCH representation of the conditional variances. In order to capture the consequences of the growing turbulence of these markets, a two-state regime switching model for futures returns ise developed.