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We employ OLS analysis on a VAR Model to test the “commodity currency” hypothesis of the Rand (i.e. that the currency moves in sympathy with commodity prices) and examine the associated causality using nominal data between 1996 and 2010. We address the question of cointegration using the Engle-Granger test. We find that level series of both assets are difference stationary but not cointegrated. Further, we find the two variables negatively related with strong and significant causality running from commodity prices to the exchange rate and not vice versa, implying exogeneity to the determination of commodity prices with respect to the nominal exchange rate. The strength of the relationship is significantly weaker than other OECD commodity currencies. We surmise that the relationship is dynamic over time owing to the portfolio-rebalance argument and the Commodity Terms of Trade (CTT) effect and in the absence of an error correction mechanism, this disconnect may be prolonged. For commodity and currency market participants, this implies that while futures and forward commodity prices may be useful leading indicators of future currency movements, the price risk management strategies may need to be recalibrated over time. For monetary policy makers, to manage commodity price risk and concentration risk on the country’s exports, we suggest establishment of a selfinsurance scheme such as a Commodity Stabilisation Fund established in Chile in 1985.

Generally, investment in commodity ETFs cannot produce similar performance as well as spot goods. Evidence shows that ¡§rolling¡¨ futures positions experience ¡§contango and the effects on contango will harm ETFs¡¨ value. This study shows that two ETFs, USO and UNG, underperform the spot substantially because of rolling in the crude oil and natural gas market, respectively. In this study we employ four energy sector futures market data from the Thomson Reuters to investigate the impact of rolling positions on the relation between commodity index funds and in contango/backwardation. This paper finds that increasing trading in commodity index fund made futures market more contango in the WTI crude oil, natural gas and heating oil markets. This study termed the strategy as the Backwardation Sensitive Trading (BST) . Moreover, this research designs an investment strategy based on variation of backwardation. That is to examine whether BST can make a successful arbitrage: increase holding when the market is more contango and decrease holding when the market is more backwardation. Our strategy performs better than USO and UNG, and those performances perform lower tracking error on oil and natural gas over 2006 to 2010.

Thesis (BPhil)--Open University.

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Model uncertainty in financial markets is prevalent by the very nature of how models are constructed and used by financial practitioners. As such, a proper characterization of model uncertainty should be paramount in the eyes of every practitioner, and furthermore, a proper framework for implementing such a characterization towards financial activities should be implicit. While model uncertainty is acknowledged by practitioners, a cohesive and robust framework for determining a model uncertainty risk measure that is broadly accepted by practitioners is missing. We acknowledge this deficiency and provide a practitioner's guide for evaluating a modern characterization of model uncertainty, specifically that of Li and Kwon, as applied to a subset of derivative related calculations, with the goal of promoting its implementation by practitioners. We promote its implementation by demonstrating the utility and flexibility of such a characterization relative to another modern model uncertainty risk measure, specifically that of Cont.

Model uncertainty in financial markets is prevalent by the very nature of how models are constructed and used by financial practitioners. As such, a proper characterization of model uncertainty should be paramount in the eyes of every practitioner, and furthermore, a proper framework for implementing such a characterization towards financial activities should be implicit. While model uncertainty is acknowledged by practitioners, a cohesive and robust framework for determining a model uncertainty risk measure that is broadly accepted by practitioners is missing. We acknowledge this deficiency and provide a practitioner's guide for evaluating a modern characterization of model uncertainty, specifically that of Li and Kwon, as applied to a subset of derivative related calculations, with the goal of promoting its implementation by practitioners. We promote its implementation by demonstrating the utility and flexibility of such a characterization relative to another modern model uncertainty risk measure, specifically that of Cont.