Price discovery efficiency of China's crude oil futures: Evidence from the Shanghai crude oil futures market

Abstract

This study investigates the pricing efficiency of the Shanghai Crude Oil Futures (SC) as a newly emerged crude oil future market from the perspective of co-integration and estimates its contribution to price discovery in China based on the vector error correction model (VECM), permanent–transitory (PT), information share (IS), and modified information share (MIS) models. All results show a long-run equilibrium relationship exists between crude oil futures and spot prices in China, but SC contributes just approximately 50% to price discovery, which is roughly equal to that of the spot market. Compared with West Texas Intermediate (WTI) and Brent crude oil markets, the pricing efficiency of SC lags significantly, which means that SC has a certain capability of price discovery, although it is now still in its initial development stage as the price taker of the international crude oil market.