On the Dynamics of Solid, Liquid and Digital Gold Futures

TL;DR

This study investigates the factors influencing volatility and basis in gold, oil, and bitcoin futures, revealing the roles of trading volume, open interest, and maturity, and confirming theoretical expectations for basis convergence.

Contribution

It applies contract-by-contract analysis to three different commodities, providing new insights into their volatility determinants and basis behavior.

Findings

Trading volume positively influences volatility across all assets.

Open interest may negatively impact volatility.

Maturity affects volatility and basis differently for each asset.

Abstract

This paper examines the determinants of the volatility of futures prices and basis for three commodities: gold, oil and bitcoin -- often dubbed solid, liquid and digital gold -- by using contract-by-contract analysis which has been previously applied to crude oil futures volatility investigations. By extracting the spot and futures daily prices as well as the maturity, trading volume and open interest data for the three assets from 18th December 2017 to 30th November 2021, we find a positive and significant role for trading volume and a possible negative influence of open interest, when significant, in shaping the volatility in all three assets, supporting earlier findings in the context of oil futures. Additionally, we find maturity has a relatively positive significance for bitcoin and oil futures price volatility. Furthermore, our analysis demonstrates that maturity affects the basis of bitcoin and gold positively -- confirming the general theory that the basis converges to zero as maturity nears for bitcoin and gold -- while oil is affected in both directions.