Price discovery in Chinese PVC futures and spot markets: Impacts of COVID-19 and benchmark analysis

Abstract

Despite being a minor futures category, Polyvinyl chloride (PVC) futures have emerging as a vital element in energy and chemical futures domain. Employing three benchmark models component share (CS), information share (IS), and information leadership share (ILS), this study explores the price discovery function of Chinese PVC futures and spot markets. It assesses whether PVC futures have matured into an effective hedging tool and reference point for spot markets, and also examines the impact of the COVID-19 pandemic on this price discovery relationship. Empirical analysis reveals that the futures market has become the primary site for price discovery in the Chinese PVC market. All the models consistently demonstrate a mature price discovery function in PVC futures, providing risk mitigation tools for industry players. However, post-pandemic dynamics indicate that price discovery in PVC markets primarily occurs within the spot market. This suggests that compared to the futures market, the PVC spot market is able to respond more quickly to the strong signals of industrial recovery after the end of the pandemic. The feedback and pricing efficiency of the PVC futures market in response to new market information are also influenced. Furthermore, our study offers better anticipation of future market prices.