V.9:10 (415-418): Price Changes During Non-Trading Hours by George R. Arrington and Howard E. Arrington

Price Changes During Non-Trading Hours by George R. Arrington and Howard E. Arrington

One frustrating aspect of trading commodities is the price changes that occur during non-trading hours. It is difficult enough to make a profit when markets are open and buy and sell orders can be executed within a relatively short time. When markets are closed, however, the trader is faced with even more obstacles. Positions cannot be changed until the markets reopen, and in the interim traders are exposed to the risks of changes in circumstances and prices.

Most commodities futures markets are open seven to eight hours a day, while a few are open for only four. Yet new information affecting the supply and demand for commodities arrives 24 hours a day. Information that may affect commodities includes such things as trade embargoes, severe weather, war, labor strikes, currency devaluation, government contracts, crop estimates and political assassinations. As a result of the new information overnight and the ensuing changes in expectations, opening prices often differ and sometimes dramatically from the closing prices of the previous day.

To assess the extent of price changes during non-trading hours, we examined daily price data for 34 commodities futures contracts. The data generally covered the period from June l990 to July l99l. We ignored price data when the open interest was less than 500 to avoid distortions that might occur in inactive markets. Distortions might occur, for example, when the September l990 contract expires and the September l99l contract begins trading. We calculated standard t-statistics to evaluate whether the average price changes we observed were statistically significant (that is, non-zero).