Stability of Spot price and Futures market for Agricultural commodity: based on the sugar products

Abstract

The mechanism of the stability of spot price will be further analyzed on the basis of ARMA-GARCH model, selecting the daily data of the spot price and the futures price of sugar products. However, as the new factors appeared, it is inappropriate to analyze by GARCH model with dummy variable. Thus, the paper also establish the GARCH model with futures trading volume to verify the spot price stability function of the futures market and test the robustness of the model. The results show that the spot prices tend to be stable with the improvement of agricultural futures market, but different agricultural futures market are not the same. The futures market of agricultural products is the earliest futures market in China, concerning soybean, corn, wheat, sugar and cotton. With the accession to the world trade organization, the Zhengzhou Futures Trading opened sugar futures market in January, 2006, aiming to provide a place to hedge sugar productions. However, in 2014, Zhengzhou Commodity Exchange of sugar futures prices fell sharply and rose sharply then. As the result, manufacturers has sold spots for the withdrawal from circulation of funds and faced the destruction. In fact, the agricultural products futures market is originally designed to promote the sound development of the spot market .However, some scholars held that the futures price of agricultural products and the spot market is separated, and the futures market is not conducive to price stability. Therefore, the objective of this study is to explore the real association between the futures market and the spot price stability. Using a sample of sugar and cotton futures as representations and the daily trading volume as a proxy for the quantity of the futures market variable, we show that spot prices tend to be stable with the establishment and improvement of agricultural futures market. The paper is organized as follows. Section I provides literature review and theoretical motivation for the empirical analysis. Section II describes the data and Section III discusses the empirical results and robustness tests. Concluding remarks are contained in Section IV.