A tale of two coffees? Analysing interaction and futures market efficiency

2020 ◽  
Vol 37 (1) ◽  
pp. 89-109
Author(s):  
Mark J. Holmes ◽  
Jesús Otero
Keyword(s):  
Market Efficiency ◽  
Unit Root ◽  
Futures Market ◽  
Recursive Estimation ◽  
Futures Contracts ◽  
Futures Prices ◽  
Content Type ◽  
Spot Prices ◽  
Unit Root Testing ◽  
Price Differentials

Purpose The purpose of this paper is to assess the informational efficiency of Arabica (other milds) and Robusta coffee futures markets in terms of predicting future coffee spot prices. Design/methodology/approach Futures market efficiency is associated with the existence of a long-run equilibrium relationship between spot and future prices such that coffee futures prices are unbiased predictors of future spot prices. This study applies unit root testing to daily data for futures-spot price differentials. A range of maturities for futures contracts are considered, and the study also uses a recursive approach to consider time variation in futures market efficiency. Findings The other milds and Robusta futures prices tend to be unbiased predictors for their own respective spot prices. The paper further finds that other milds and Robusta futures prices are unbiased predictors of the respective Robusta and other milds spot prices. Recursive estimation suggests that the futures market efficiency associated with these cross cases has increased, though with no clear link to the implementation of the 2007 International Coffee Agreement. Originality/value The paper draws new insights into futures market efficiency by examining the two key types of coffee and analyses the potential interactions between them. Hitherto, no attention has been paid to futures contracts of the Robusta variety. The employment of unit root testing of spot futures coffee price differentials can be viewed as more stringent than an approach based on non-cointegration testing.

Recession effect in pricing efficiency of rubber futures: the emerging market’s experience

2019 ◽  
Vol 9 (5) ◽  
pp. 503-519 ◽  
Author(s):  
Saji Thazhugal Govindan Nair
Keyword(s):  
Natural Rubber ◽  
Market Efficiency ◽  
Emerging Market ◽  
Economic Recession ◽  
Futures Market ◽  
Futures Contracts ◽  
Causal Relations ◽  
Content Type ◽  
Long Run ◽  
Cointegration Tests

Purpose The purpose of this paper is to investigate the recession effects in market efficiency of natural rubber futures contracts traded in India. Design/methodology/approach The research draws inferences from Granger causality and Engle–Granger cointegration tests, which are administered separately on 14 year daily price data spanning into two distinct, non-overlapping time series of 2004–2008 and 2009–2017. Findings Analysis shows that rubber futures market is informationally efficient in price discovery. The results of cointegartion tests indicate that a long-term relationship does exist between futures and spot prices of the natural rubber in India. The recession effects in the market efficiency of rubber futures contracts are evident from the increase in optimal hedge ratios estimated with the cointegration methodology. Research limitations/implications The study pursues a simple cointegration methodology to assess the causal relations between spot and futures market prices in the Indian context. Future studies investigating the long-run causal relations, with error correction framework, between spot and future prices of rubber from other leading rubber producing countries can validate the findings more on this issue. Practical implications The research expects to pass on vital information inputs on the implications of future contracts to rubber traders for managing their portfolios. The study of this kind definitely will be a great help to farmers and exporters who are potentially interested in gaining access to a hedging vehicle. Originality/value The paper is unique in terms of understanding the effects of economic recession in information efficiency of futures market. Moreover, a limited number of studies have explored the functional utilities of rubber futures in emerging market context.

scholarly journals Relationship Between Spot Prices and Futures Prices: Evidence From Karachi Stock Exchange

2021 ◽  
Vol 5 (2) ◽  
pp. 109-123
Author(s):  
Muhammad Asif Ali ◽  
Muhammad Asif Ali ◽  
Dr. Naveed Hussain Shah
Keyword(s):  
Granger Causality ◽  
Stock Exchange ◽  
Granger Causality Test ◽  
Spot Market ◽  
Futures Market ◽  
Futures Prices ◽  
Causality Test ◽  
Spot Prices ◽  
Unit Root Testing ◽  
Integration Test

This study investigates the relationship between futures prices and their underlying spot prices of the stocks trading on Pakistan stock market. Data on the monthly closing prices of future contracts and their underlying stocks of 30 companies for the period January 2004 to June 2014 have been taken for analysis. Descriptive statistics, Augmented Dicky Fuller test for unit root testing, Johnson Co-integration test, Granger causality test and Vector Error Correction Model are used. The results confirms significant long term relationship between futures prices and the associated Spot prices in case of 26 companies. The report of Granger causality test indicates that a Bi-directional causality lack to exist in case of each security, VECM shows that Spot prices for current month are effected by previous month prices in case of 7 companies, while futures prices of current month are affected by previous month prices in case of 4 companies. VECM illustrates that the volatility shocks in spot market are less effected by futures market, however the volatility shocks in corresponding futures market were strongly and significantly affected by spot market volatility.

Relationship between Coffee Prices in Spot and Futures Markets-An Empirical Analysis

2020 ◽  
pp. 180-188
Keyword(s):  
New York ◽  
Correlation Coefficients ◽  
Strong Relationship ◽  
Futures Market ◽  
Regression Coefficients ◽  
Futures Prices ◽  
Market Prices ◽  
Spot Prices ◽  
Correlation And Regression Analysis ◽  
Highly Correlated

The present study explored the relationship between spot and futures coffee prices. The Correlation and Regression analysis were carried out based on monthly observations of International Coffee Organization (ICO) indicator prices of the four groups (Colombian Milds, Other Milds, Brazilian Naturals, and Robustas) representing Spot markets and the averages of 2nd and 3rd positions of the Intercontinental Exchange (ICE) New York for Arabica and ICE Europe for Robusta representing the Futures market for the period 1990 to 2019. The study also used the monthly average prices paid to coffee growers in India from 1990 to 2019. The estimated correlation coefficients indicated both the Futures prices and Spot prices of coffee are highly correlated. Further, estimated regression coefficients revealed a very strong relationship between Futures prices and Spot prices for all four ICO group indicator prices. Hence, the ICE New York (Arabica) and ICE Europe (Robusta) coffee futures prices are very closely related to Spot prices. The estimated regression coefficients between Futures prices and the price paid to coffee growers in India confirmed the positive relationship, but the dispersion of more prices over the trend line indicates a lesser degree of correlation between the price paid to growers at India and Futures market prices during the study period.

Pricing of Futures Contracts

2018 ◽  
Author(s):  
Timothy A. Krause
Keyword(s):  
Fair Value ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Spot Price ◽  
Futures Prices ◽  
No Arbitrage ◽  
Spot Prices ◽  
Cost Of Carry ◽  
Contract Expiration ◽  
The Cost

This chapter examines the relation between futures prices relative to the spot price of the underlying asset. Basic futures pricing is characterized by the convergence of futures and spot prices during the delivery period just before contract expiration. However, “no arbitrage” arguments that dictate the fair value of futures contracts largely determine pricing relations before expiration. Although the cost of carry model in its various forms largely determines futures prices before expiration, the chapter presents alternative explanations. Related commodity futures complexes exhibit mean-reverting behavior, as seen in commodity spread markets and other interrelated commodities. Energy commodity futures prices can be somewhat accurately modeled as a generalized autoregressive conditional heteroskedastic (GARCH) process, although whether these models provide economically significant excess returns is uncertain.

An investigation of price discovery and volatility spillovers in India’s foreign exchange market

2015 ◽  
Vol 42 (2) ◽  
pp. 261-284 ◽  
Author(s):  
Sanjay Sehgal ◽  
Wasim Ahmad ◽  
Florent Deisting
Keyword(s):  
Price Discovery ◽  
Stock Exchange ◽  
Futures Market ◽  
Volatility Spillover ◽  
Futures Prices ◽  
Content Type ◽  
Volatility Spillovers ◽  
Currency Market ◽  
Short Run

Purpose – The purpose of this paper is to examine the price discovery and volatility spillovers in spot and futures prices of four currencies (namely, USD/INR, EURO/INR, GBP/INR and JPY/INR) and between futures prices of both stock exchanges namely, Multi-Commodity Stock Exchange (MCX-SX) and National Stock Exchange (NSE) in India. Design/methodology/approach – The study applies cointegration test of Johansen’s along with VECM to investigate the price discovery. GARCH-BEKK model is used to examine the volatility spillover between spot and futures and between futures prices. The other two models namely, constant conditional correlation and dynamic conditional correlation are used to demonstrate the constant and time-varying correlations. In order to confirm the volatility spillover results, the study also applies test of directional spillovers suggested by Diebold and Yilmaz (2009, 2012). Findings – The results of the study show that there is long-term equilibrium relationship between spot and futures and between futures markets. Between futures and spot prices, futures price appears to lead the spot price in the short-run. Volatility spillover results indicate that the movement of volatility spillover takes place from futures to spot in the short-run while spot to futures found in the long-run. However, the results of between futures markets exhibit the dominance of MCX-SX over NSE in terms of volatility spillovers. By and large, the findings of the study indicate the important role of futures market in price discovery as well as volatility spillovers in India’s currency market. Practical implications – The results highlight the role of futures market in the information transmission process as it appears to assimilate new information quicker than spot market. Hence, policymakers in emerging markets such as India should focus on the development of necessary institutional and fiscal architecture, as well as regulatory reforms, so that the currency market trading platforms can achieve greater liquidity and efficiency. Originality/value – Due to recent development of currency futures market, there is dearth of literature on this subject. With the apparent importance of currency market in recent time, this study attempts to study the efficient behavior of currency market by way of examining the price discovery and volatility spillovers between spot and futures and between futures prices of four currencies traded on two platforms. The study has strong implications for India’s stock market especially at the time when its currency is under great strain owing to the adverse impact of global financial crisis.

The Unbiasedness and Hedging Effectiveness in KOSPI200 Futures Market

2007 ◽  
Vol 15 (1) ◽  
pp. 73-100
Author(s):  
Seok Kyu Kang
Keyword(s):  
Risk Management ◽  
Risk Premium ◽  
Futures Market ◽  
Spot Price ◽  
Sample Period ◽  
Futures Prices ◽  
Spot Prices ◽  
Hedging Effectiveness ◽  
Futures Price ◽  
Rolling Windows

This study is to examine the unblasedness hypothesis and hedging effectiveness in KOSPI20() futures market. The unbiasedness and efficiency hypothesis is carried out using a cointegration methodology. And hedging effectiveness is measured by comparing hedging performance of the naive hedge model, OLS hedge model. and constant correlation bivariate GARCH (1. 1) hedge model based on rolling windows. The sample period covers from May. 3. 1996 to December. 8, 2005. The empirical results are summarized as follows: First, there exists the cOintegrating relationship between realized spot prices and futures prices of the 10 day. 22 day. 44 day. and 59 day prior to maturity. Second. futures prices of backward the 10 day. 22 day. 44 day from maturity provide unbiased forecasts of the realized spot prices. The KOSPI200 futures price is likely to predict accurately future KOSPI200 spot prices without the trader having to pay a risk premium for the privilege of trading the contract. Third. for shorter maturity. the futures price appears to be the best forecaster of spot price. Forth, bivariate GARCH hedging effectiveness outperforms the naive and OLS hedging effectiveness. The implications of these findings show that KOSPI200 futures market behaves as unbiased predictor of future spot price and risk management instrument of KOSPI200 spot portfolio.

The impact of embedded location options on price discovery of agricultural futures contracts – the evidence from the Chana contract

2022 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sanjay Mansabdar ◽  
Hussain C. Yaganti ◽  
Sankarshan Basu
Keyword(s):  
Price Discovery ◽  
Time Series Data ◽  
Futures Contracts ◽  
Series Data ◽  
Futures Prices ◽  
Content Type ◽  
Futures Contract ◽  
Agricultural Futures ◽  
Embedded Options ◽  
The Impact

Purpose Embedded options can create asymmetries in information impounded by cash and futures markets, causing errors in price discovery estimation. This paper aims to investigate the impact of embedded location options on measures of price discovery. Design/methodology/approach Various price discovery metrics are computed using observed futures prices that contain embedded location options and cash prices for Chana. Prices of a futures contract that contains no options using observed futures prices and estimates of location option value are synthesized. The price discovery measures are recomputed using synthetic option-adjusted futures contract prices and cash prices, and changes in these measures are attributed to the impact of the embedded location option. Findings If the presence of the location option is ignored, futures appear to dominate price discovery. Once the location option is adjusted for, cash markets are found to dominate price discovery. Research limitations/implications The lack of complete time-series data from the exchange for multiple commodities allows only limited empirical evidence for generalizing conclusions. Practical implications This paper highlights that regulators, exchanges and policymakers in India need to revisit delivery specifications of agricultural commodity futures contracts to enhance their utility from a price discovery perspective. Originality/value This work shows that ignoring the presence of embedded options can cause significant errors in price discovery assessment of agricultural futures contracts, particularly in heterogenous cash markets.

Market efficiency and price risk management of agricultural commodity prices in India

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Manogna R.L. ◽  
Aswini Kumar Mishra
Keyword(s):  
Risk Management ◽  
Market Efficiency ◽  
Price Discovery ◽  
The Other ◽  
Price Risk ◽  
Futures Prices ◽  
Agricultural Commodities ◽  
Content Type ◽  
Price Risk Management ◽  
Guar Seed

Purpose Market efficiency leads to transparent and fair price discovery of commodity markets, thus enhancing the value chain for competitive benefit. The purpose of this paper is to investigate the market efficiency of Indian agricultural commodities at spot, futures and mandi markets apart from exploring price risk management in these markets. Design/methodology/approach This study uses Johansen co-integration, vector error correction model and granger causality for analyzing market efficiency of the nine most liquid agricultural commodities across three markets, namely, spot, futures and mandi. All these nine commodities are traded on National Commodity and Derivatives Exchange. Findings The statistical results indicate price discovery exists in the mandi market and spot market leading to futures prices. Mandi price returns are seen to negatively influence futures returns in the case of cotton seed, guar seed and spot returns in the case of jeera, coriander and chana. For castor seed, the three markets are seen to have no long run relationship. The results of Granger causality reveal short run relationship between all the three markets in the case of soybean seed and coriander. In these commodities, prices in all three markets are capable of predicting the prices in the other markets. For the case of cottonseed, Rape Mustard seed, jeera, guar seed, the results indicate unidirectional causality between the mandi markets and the other two markets. Research limitations/implications These results shall facilitate policymakers to explore intervention through integrated agri-platform (IAP) in price discovery and market efficiency. Practical implications The results of this study are useful in understanding the price discovery of mandi markets and its role in the spot and futures market. Agricultural commodities price discovery depends upon the integration of all these three markets. Introduction of IAP as described in the paper shall facilitate price risk management apart from improving the efficiency of price discovery. Originality/value To the best of the knowledge, this is the first study considering mandi, spot and futures prices in the price discovery process in India. In addition, this study found the role of mandi markets in serving the economic function of price discovery and price risk management. Hence, suggests for policy intervention for Indian agricultural commodities to manage price risk.

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