Is China the price taker in soybean futures?

Abstract

Purpose – The purpose of this paper is to examine whether China is still a passive price taker from the US soybean futures, or instead domestic futures market has developed certain degrees of pricing power through time. The finding helps to identify the importance of China soybean futures in the perspective of portfolio selection for international futures traders. If China soybean futures market is no longer a price taker after the subprime crisis, traders need to include it as a separate category in their portfolio. Design/methodology/approach – This paper uses exponential generalized autoregressive conditional heteroskedasticity-generalized error distribution (EGARCH-GED) and generalized autoregressive conditional heteroskedasticity-generalized error distribution (GARCH-GED) models to test spillover effects between Dalian Commodity Exchange (DCE) and Chicago Board of Trade (CBOT) soybean futures. The authors divide daily samples into three subperiods based on the subprime crisis. Three research questions – whether China is still the price taker, the importance of Chinese soybean futures in international futures portfolio selection, and the influences of subprime crisis on soybean futures volatility relationship – are examined by comparing estimation results through time and different contracts. Findings – The spillover effect from CBOT soybean futures to DCE No. 1 soybean futures becomes weaker through time. China is no longer a soybean futures price taker after the subprime crisis. The authors also find the shocks of bearish news on DCE soybeans are greater than those of bullish news. Potential volatility of DCE in long positions is bigger than that in short positions. Practical implications – China is the largest soybean importer. DCE is a very important futures market for non-genetically modified soybeans. It is necessary for both international and domestic futures traders to understand the changes in international soybean futures price relationship and take corresponding strategies. It is also important for market to realize that DCE soybean futures are to a less degree price taker after the subprime crisis. Originality/value – The paper applies EGARCH-GED and GARCH-GED models to identify changes in spillover effects before, during, and after the subprime crisis. Different from other studies, this paper finds after the subprime crisis, China is no longer the soybean futures price taker. This paper also compares the spillover effects of non-genetically modified soybean futures (No. 1 soybean futures) with genetically modified soybean futures (No. 2 soybean futures).