Price Discovery Function Research Articles

An empirical analysis on the price discovery function of iron ore futures market in China

The role of the iron ore futures market in price discovery is crucial when studying the future trend of China's iron ore market. To promote the healthy and sustainable development of China's iron ore futures market, this study collected data on the closing prices of the main chain of iron ore and China's iron ore spot price index from December 2019 to December 2023 in the Dalian Commodity Futures Exchange. This paper aims to empirically analyze research methods and explore the mechanism behind price discovery in China's iron ore futures market. Through detailed empirical research and in-depth analysis, this study reveals a close relationship between the volatility of iron ore futures and iron ore spot market prices, forming a long-term economic balance between them.

Price Discovery Function of Government Bond Futures: Evidence from Chinese 10-Year Treasury Note Markets

Utilizing the data of the futures and spot prices of Chinese 10-year Treasury notes from 2015 to 2022, this paper examines the price discovery mechanism on Chinese Treasury bond markets. We find that there is a significant cointegrating relationship between the futures price and the spot price of Chinese 10-year Treasury notes, and that in this long-run equilibrium the futures price has a one-way predicting effect on the spot price. We also find that the proportions of the variations in the spot price and the futures price explained by a shock or impulse in the futures market is higher in a later period than in a comparable earlier period, indicating that the contribution of the futures market to the price discovery has been increasing gradually. These results suggest that the price discovery function of futures markets is significant and has become more important to market efficiency. Furthermore, the disparities of our 10-year-note results from the previous 5-year-note results indicate that the price discovery function varies across underlying assets.

The Post-Internationalization Evolution of the Price Discovery Pattern in China’s Iron Ore Markets

Previous literature provided evidence of a negative impact of internationalization on the quality of China’s iron ore futures market within a 6-month window (i.e. June 1, 2018 to November 31, 2018), but little is known on the long-term impact. Using a longer, 4-year-7-month window from June 1, 2018 to December 30, 2022, we examine the market’s price discovery function, an important measure of market quality. We find significant structural break in China’s iron ore data series in August 2021, which largely coincide with a period of rising commodity prices to all-time high. Before the breaks, the price discovery function of China’s iron ore futures appears quite weak, with the spot market leading the futures market, which is consistent with the findings of Fan et al. During the post-break period, however, the futures market demonstrates a stronger price discovery function and takes over the leading role. The day-of-the-week effects in iron ore futures also seem to weaken post-break as well. Our GARCH model results exhibit significant bi-directional volatility spillover between the futures and spot markets.

Research On the Impact of Aluminum Metal Futures Prices on The Stock Prices of Aluminum Enterprises- Based on The Perspective of Upstream and Downstream

This paper takes aluminum metal futures as an example to explore the impact of fluctuations in non-ferrous metal futures prices on the stock price performance of related listed companies. Firstly, the basic situation of aluminum futures is introduced, and then further discussion is conducted on how aluminum futures affect the stock prices of upstream and downstream enterprises related to aluminum. Then, empirical analysis is conducted. This article uses methods such as ADF, EG-ADF, ECM model, and Granger test to explore the impact of aluminum metal futures prices on the weighted stock prices of upstream and downstream enterprises related to aluminum. The research results indicate that the impact of aluminum metal futures prices on the stock prices of aluminum enterprises varies with different positions in the industry chain. There is a one-way guiding relationship for the weighted stock prices of upstream aluminum enterprises, while there is no leading and lagging guiding relationship for the weighted stock prices of downstream enterprises. Based on the upstream and downstream perspectives, this article selects four representative listed companies in the aluminum industry to weight their stock prices according to their market value ratios, and explores their relationship with aluminum futures prices. This study helps investors evaluate stock price trends and make wiser investment choices; Adjusting business plans and coordinating stock prices for aluminum enterprises has positive significance; At the same time, it helps regulatory authorities to gain a deeper understanding of market information and further understand the price discovery function of futures markets

Structural Dynamics of Indian Commodity Derivatives Market

"The inter temporal dimensions of an asset are examined through the price discovery function analysis of futures and spot price dynamics. The present study used Granger causality test and Chow test to analyze the price discovery function and the structural break of the agriculture, base metals, bullion, and energy commodities futures and spot prices during 2016-2022. The findings revealed the bidirectional causality between both the spot and future markets except gold exhibited unidirectional causality where the future market lead on the spot return is greater than contrary. Since the selected time period captures the crisis period, understanding the dynamic patterns is important for derivative valuation, hedging and asset allocation. The result of structural break revealed that among the selected commodities, only few commodities does not exhibit the structural break during the crisis period. This infer that the demand and supply for those commodities would exist in equilibrium condition and the shocks would not be transmitted to the price of commodities. The study makes recommendations for market participants to use arbitrage and hedging tactics. Additionally, it assists the regulators in assessing the steadiness of expanding commodity futures markets in India."

The price continuity, return and volatility spillover effects of regular and after-hours trading.

This study employs a bivariate EGARCH model to examine the Taiwan Futures Exchange's regular and after-hours trading, focusing on the critical aspects of spillover and expiration effects, as well as volatility clustering and asymmetry. The objective of this study is to observe the impact on the trading sessions in Taiwan by the influences of the European and American markets, focusing on the essential roles of the price discovery function and risk disclosure effectiveness of the regular hours trading. This research is imperative considering the increasing interconnectedness of global financial markets and the need for comprehensive risk assessment for investment strategies. It also examines the hedging behavior of after-hours traders, thereby aiming to contribute to pre-investment analysis by future investors. This examination is vital for understanding the dynamics of after-hours trading and its influence on market stability. Results indicate price continuity between both trading sessions, with regular trading often determining after-hours price ranges. Consequently, after-hours price changes can inform regular trading decisions. This finding highlights the importance of after-hours trading for shaping market expectations. Significant profit potential exists in after-hours trading open interest, which serves speculative and hedging purposes. While regular trading volatility influences after-hours trading, the reverse is not true. This suggests Taiwan market information poses a higher risk impact than European and American market data, emphasizing the unique position of the Taiwan market in the global financial ecosystem. After-hours trading volatility reflects the absorption of international market information and plays a crucial role in advance revelation of risks. This underscores the importance of after-hours trading in global risk management and strategy formulation.

Price discovery and volatility spillovers in the interest rate derivatives market

The interest rate derivatives market is an important force in promoting the development of the bond market and is an effective tool to manage interest rate risk. The research on price discovery and volatility spillover of the market can help provide valuable reference information for investors. Based on treasury bond futures and interest rate swaps, the paper aims to discuss the price discovery function and spillover structure of the interest rate derivatives market. The paper establishes the information share model and spillover index model for empirical analysis. The results show that: First, the calculation results of the information share model show that the price discovery of treasury bond futures and interest rate swap markets is stronger than that of the spot market. Second, based on structural break analysis, treasury bond futures and interest rate swaps do not have breakpoints, while the treasury bond spot has three breakpoints. The paper divides the entire sample into four stages based on structural breakpoints and finds that the price discovery ability of the interest rate derivative market dynamically changed. Third, as a net spillover in the market, treasury bond futures have developed relatively stable. Both treasury bond futures and interest rate swaps have spillover effects on the spot market, indicating that China’s interest rate derivatives market can impact the treasury bond spot market.

A multi-dimensional assessment of the accuracy of analyst target prices

This paper provides the first assessment for the quality of analyst target forecasts within an emerging market. We find that analysts' target forecasts tend to commit systematically upward bias (9.4%), large absolute pricing error (24.8%), over-prediction of the actual price changes (21%), and a low proportion (54%) of correct directional forecasts. The forecasting quality decays over time as the information in the target prices becomes obsolete, long before the one-year expiry period indicated in the analyst reports. Nevertheless, analysts’ target forecasts consistently outperformed alternative forecasts generated solely based on historical data, which confirms the price discovery function of analyst forecasting. A number of factors are found to be influential to the target performance. Target quality is adversely associated with stock idiosyncratic risk, prior index volatility, the aggressiveness of the target forecasts, and the optimism of consensus targets. In addition, more accurate target prices are delivered by brokerages that have prior experience with the industry and the companies under review, but not by brokerages that possess monopoly power on the stock-specific information.

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

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.

Is China's new live hog futures market efficient? Evidence from an analysis of market quality, price discovery and hedging effectiveness

AbstractOn 8 January 2021, China's first live‐animal and live‐delivery futures product—in live hogs—was listed on the Dalian Commodity Exchange to serve as a risk management tool. We examine whether this newly established market exhibits good market quality and has realised its primary functions of price discovery and hedging. Our results suggest that the live hog futures market performs its price discovery function well and can hedge between 4% and 27% of the risk in the spot market, even though it is less actively traded, less liquid and more volatile than egg futures markets. To strengthen the hedging function of the live hog futures market, more effort—such as recruiting market makers and introducing night trading sessions—should be exerted to increase and smooth trading and stabilise volatility.

Research on Price Discovery Function of China Pig Futures Market

On January 8, 2021, China Pig futures was listed on Dalian Commodity Exchange. Its listing has brought new tools for the risk management of hog prices, and has aroused widespread concern in the community. Research on the price discovery function of pig futures market is of great significance to the price risk management of pigs. This paper takes the China pig futures and spot market as the research object, selects the live pig futures and spot trading data of China from January 8, 2021 to September 28, 2023, and makes a preliminary effectiveness analysis on the price discovery function of the futures market through the trend of spot prices. Secondly, the data are tested for stationarity and cointegration, and then the VAR model is established. Through descriptive statistics, Granger causality test, impulse response and variance decomposition analysis, the price discovery function of China pig futures market is further analyzed. The results show that China pig futures market has played a certain price discovery function, but there is still room for improvement. Based on this, the relevant countermeasures and suggestions are put forward: to improve the relevant rules and systems of pig futures, to strengthen the standardization construction of the over-the-counter market of pigs, and to promote the enthusiasm of enterprises in the pig industry chain to participate in the futures market.

Relations among Bitcoin Futures, Bitcoin Spot, Investor Attention, and Sentiment

This research investigates the function of price discovery between the Bitcoin futures and the spot markets while also analyzing the impact of investor sentiment and attention on these markets. This study utilizes various statistical models to examine the short-term and long-term relations between these variables, including the bivariate Granger causality model, the ARDL and NARDL models, and the Johansen cointegration procedure with a vector error correction mechanism. The results suggest that there is no statistical evidence of price discovery between the Bitcoin spot price and futures, and the term structure of the Bitcoin futures neither enriches nor impairs this lead lag relation. However, the study finds robust evidence of a long-run cointegrating relation between the two markets and the presence of asymmetry in them. Moreover, this research indicates that investor sentiment exhibits a lead lag relation with both the Bitcoin futures and the spot markets, while investor attention only leads to the Bitcoin spot market, without showing any lead lag relation with the Bitcoin futures. These findings highlight the crucial role of investor behavior in affecting both Bitcoin futures and spot prices.

The Influence of Investor Sentiment on Futures Price Volatility: Evidence from the Chinese Crude Oil Market

With the progress of crude oil financialization, crude oil futures has become an important derivative product, and its price discovery function has been widely concerned by investors. The relationship between sentiment and price can be studied by constructing oil market sentiment index. Considering that the investor sentiment of single-market energy futures may not reflect the cross-market impact well, this paper selected OI, PSY, RSI and other commonly used futures trading indicators, and used principal component analysis to construct the investor sentiment indexes of single-market (crude oil) and cross-market (crude oil, fuel oil, coking coal, coke) respectively. VAR, Granger test and linear regression are used to explore the influence of investor sentiment on the volatility of crude oil futures prices. The results show that: (i) There is a Granger causality relationship between single market (crude oil) investor sentiment and crude oil price; (ii) There is no Granger causality relationship between cross-market investor sentiment and crude oil price; (iii) Single market and cross-market investor sentiment have an asymmetric effect on the price fluctuation of crude oil futures market.

Commodity market financialization, herding and signals: An asymmetric GARCH R-vine copula approach

Institutional investors have significantly increased their exposure to commodity futures after 2004 in the process of commodity market financialization, raising questions about the risk-sharing and price-discovery functions of the market. We identify some symptoms of financialization through examining S&P500, JPM bond index, and 18 S&P GSCI excess return indices, employing ARMA-GARCH R-vine copula approach that can flexibly model high-dimensional multivariate asymmetric tail dependence. We discover three trends: an increased resemblance between the news impact curve of stocks and those of commodities; an increased bi-variate stock-commodity tail dependence; and an increased multivariate tail-dependence across all commodities. We also explore the market structural change underlying these symptoms using an augmented news impact curve. We suggest and provide evidence that herding, in addiction to leverage effect, explains the observed symptoms. The findings have profound implications for commercial hedgers and financial traders, and for regulators who are concerned about the functionalities of commodity futures market.

Impacts of trading restrictions on price volatilities and speculative activities: Evidence from CSI 300 futures

Commonly trading restrictions have various impacts on asset prices and investors’ speculative activities. This study uses the unique trading restrictions in China from 2015 to 2017 to study how it affects the price volatilities and speculative activities of China Securities Index 300 (CSI 300) futures. To capture the daily price volatilities precisely, we apply four different measures incorporate opening, high, low, and closing prices. Speculative and hedging activities are calculated by using volume and open interest data. We find interesting evidence that trading restrictions decrease the price volatilities and the trading activities of speculators. However, though the trading restrictions have been eased since 2017, the speculators are still unwilling to participate in futures market immediately. Overall, the trading restrictions affect the price volatilities and speculative activities and provide the protection for the majority of investors, however, it also hinders the price discovery function of the futures market.

Empirical Analysis on Price Discovery Efficiency of Cotton Futures in China

Futures markets are fundamentally driven by price discovery. China has the highest cotton output and consumption, so enhancing the cotton futures price discovery function promotes the sustainable and healthy growth of China's cotton sector. We used cotton futures and spot prices from 2018 to 2022 as research samples to examine the changes in cotton futures price discovery efficiency amid the Sino-US trade war and the appearance of Covid-19. Using the IS model, we observed that: (1) the cotton futures market always holds a dominating position in price discovery throughout 2018-2022, and (2) the impact of Covid-19 significantly lowered the price discovery function of the cotton futures market, which shows that: (1) the Chinese cotton futures market is not yet able to endure the impact of unexpected and large-scale health events such as Covid-19; and (2) when emergencies arise, we should respond expeditiously in order to reestablish market stability.

Hedging Effectiveness and Influential Direction Between Spot and Futures Market of Aluminium: An Evidence from India

The article is an attempt to evaluate the price discovery functions and hedging effectiveness of the aluminum futures market in India. The article identifies the influential direction of price discovery and hedging effectiveness of the aluminum futures market of India. It has especially focused on the aluminum futures market of India for a period ranging from 2013 to 2020. Augmented Dicky-fuller test, PP test, Cointegration test, exogeneity Wald test, Wald co-efficient test, Granger causality test, variance decomposition and minimum variance hedge ratio are employed to achieve the objective of the study. The study finds a bi-directional causality effect between aluminum’s cash and the futures market. Therefore, the Spot and futures markets of aluminum influence each other in the price discovery. The findings of variance decomposition suggest that the futures market of aluminum implies weak exogenoity on spot. Similarly, futures prices reflect strong endogeneity. The hedge ratio of sub-sample and full sample period indicates that there is a lack of hedging effectiveness of aluminum futures. The study will help the hedgers to decide the number of futures positions they need to take to manage their spot exposure. It will help the futures market regulators to examine the stability of the market and other participants to design hedging and arbitrage strategies.

The role of China's crude oil futures in world oil futures market and China's financial market

China's crude oil futures (COF) denominated in RMB were formally launched in 2018 and traded in the Shanghai International Exchange (INE), which was an important milestone in China's energy financialization. Combining TVP-VAR method and DY spillover index, this paper firstly studied the information spillover relationship between the world's major COF and crude oil spot (COS) markets before and after the launch of China's COF. It is found that China's COF mainly play the role of net information receiver in world COF/COS market, and its influence in international market and price discovery function needs to be improved. Further, this paper comprehensively considered China's financial system, taking volatility of financial time series as risk proxy to investigate the risk spillover effect. The results show that the financial attributes of China's COF have become prominent. The dynamic analysis shows that since the launch of China's COF, the degree of its net spillover to other markets has generally been on the decrease, assuming a net risk transmitter role. On this basis, this paper puts forward policy recommendations to promote the development of China's COF.

Price guidance and discovery of the Chinese stock index Futures: Based on the rising, falling and fluctuating states

Stock index futures have been around for more than 12 years in the Chinese market, but there are conflicting viewpoints on the role of Chinese stock index futures in the market. Many crises, including COVID-19, have heightened the financial system's vulnerability and instability. Do China's stock index futures play a role in stabilizing the market and discovering prices in turbulent times? This study employs a combination of VEC, PT, and IS methodologies to investigate the lead-lag relation and price discovery ability of stock index futures markets. By evaluating price interactions in three different scenarios, we reveal that stock index futures play a prominent role in price discovery, particularly in markets with excessive volatility. However, their impact on price discovery is weaker during stable market conditions. To the best of our knowledge, this study is the first to categorize the Chinese stock market into different states, providing valuable insights into the price discovery function of stock index futures. Our findings have important implications for policymakers and investors, as they highlight the need for increased attention to market manipulation and excessive speculation during volatile market conditions to protect the interests of investors.

Decarbonization roadmap for China’s energy sector in the context of carbon futures trading: An energy-environment-economy assessment perspective

By virtue of the hedging and price discovery function, carbon futures trading may help carbon market function more effectively. Is it necessary to establish carbon futures trading in China? The authorities have endorsed the idea since 2015, however, the scheme has not yet started; no antecedent pre-assessment quantitative research has been carried out. Therefore this study that attempts to fill this gap in the literature, could be of real significance. Through deriving a potential decarbonization roadmap, this study tries to give some clues pertaining to the converted mitigation strategy imposed by carbon futures trading in China. A model chain has been proposed, which is composed of the Optimal Production Decision-making Model for Producers, Life Cycle Impact Assessment, Monetization, and Genetic Algorithm based optimization, to quantify the environmental benefits (including improvements to human health, ecosystem damage and increased temperature induced GDP losses) of the assumed mitigation trajectories. By setting the maximization of environmental benefits as the objective, the optimal decarbonization roadmap with carbon futures trading is derived. Results show that the optimal emission reductions for power enterprises (covered by the carbon market) for the next 10 years (2021–2030) are around 3.27 billion tonnes CO2e. If 36% of this amount is assigned to previously discussed mitigation trajectories, it is found that 106.98 GW ultra-super critical units, 160.85 GW mono-Si PV facilities and 167.26 GW doubly-fed induction generator wind capacity should be installed. Overall environmental benefits are 4.6 trillion CNY2018, over 5% of China’s 2018 GDP. Results demonstrate the optimal emission reductions and potential decarbonization roadmap for China’s power enterprises (those covered by the carbon market) under the context of carbon futures trading, which can be an important reference for the authorities and therefore encourage the establishment of the scheme.