Dynamic Price Discovery Process of Chinese Agricultural Futures Markets: An Empirical Study Based on the Rolling Window Approach

Yuanyuan Xu,Jian Li,Chuanmei Wang,Fanghui Pan

doi:10.1017/aae.2019.23

Abstract

AbstractWe investigate the dynamic evolution of the price discovery function in Chinese agricultural futures markets using a newly developed rolling window cointegration approach. The results show that, compared with wheat and rice, the futures-spot cointegration relationship in the soybean and corn markets tends to be more durable and frequent. Dynamic cointegration analysis indicates that the recent market-oriented reforms in China have boosted the price discovery function of soybean and corn futures markets, whereas price stabilization policies tend to weaken the price discovery function of futures markets. The difference in price discovery function is attributed to differences in market mechanisms and Chinese agricultural policies.

Highlights

Agriculture provides the main source of food for human consumption
How do price signals diffuse across the futures and spot markets? How have the transmission effects of futures and spot prices changed over time? Are there different behaviors from each market in response to external factors? Definitive answers to these questions would provide information and implications for the market participants to better understand the price discovery function in agricultural futures markets
The price discovery function means that futures prices are unbiased estimates of future spot prices—that is, Ft = E(ST|It), where It represents the information set at the tth day, ST refers to the spot price at the time (Tth) of the due date, and Ft is the futures price on the tth day

Summary

Introduction

Agriculture provides the main source of food for human consumption. Agricultural prices are directly related to the stability of national economics and the improvement in people’s living standards. We apply the rolling window approach (including 1,929 subsamples in total) to capture the time-varying characteristics of price transmission effects, with a special focus on dynamic panorama under the background of economic and policy changes. Differences in both the frequency at which cointegration appears and its duration indicate that the transmission effects between futures prices and spot prices in the corn and soybean markets are stronger than those in the wheat and rice markets.

Sample data

Methodology

Static test of transmission effect between futures prices and spot prices

Findings

Conclusions