Price Linkages between Chinese and International Metal Future Markets

Abstract

This paper studies the dynamic relationships of three metal future contracts (copper, aluminum and zinc ) traded on London Metal Exchange and Shanghai Future Exchange based on Error Correction Model. The main discoveries are: 1. A cointegration relationship exists between the two markets and prices in LME adjust faster to equilibrium than that of SFE; 2. ‘irreversible’ property of these three metal commodities is tested and confirmed; 3. Sub-sample tests show that adjustment speed on both markets becomes bigger and significant as Chinese future market develops except aluminium in SFE, and the points at which significant changes occur often are consistent with either changes on participants’ behavior or implementation of influential policy in reality.