Multiscale Price Discovery in the Global Futures Markets: Evidence from Wavelet Analysis

Abstract

The sharp increase in liquidity has exacerbated volatility in futures markets. The shocks in volatility patterns have triggered the urgent need to re-examine the efficiency of futures markets, but this time on a time scale. In this study, we examine the effectiveness of global futures markets as a reference for future prices. We perform spectrogram analysis to determine the signal sensitivity of both markets, as expressed by the association between the spot and futures markets. We also observe the correlation pattern of spot and futures co-movements in the time-frequency domain. Our study shows that agricultural and energy markets are inefficient in the short term. The low short-term positive correlation leads to a temporary divergence in spot and futures prices, which provides a profit opportunity for futures contract speculators.