Dynamic Price Discovery Process of Chinese Agricultural Futures Markets: An Empirical Study Based on the Rolling Window Approach

Abstract

We investigate the dynamic evolution of the price discovery function in Chinese agricultural futures markets using a newly developed rolling window cointegration approach. The results show that, compared with wheat and rice, the futures-spot cointegration relationship in the soybean and corn markets tends to be more durable and frequent. Dynamic cointegration analysis indicates that the recent market-oriented reforms in China have boosted the price discovery function of soybean and corn futures markets, whereas price stabilization policies tend to weaken the price discovery function of futures markets. The difference in price discovery function is attributed to differences in market mechanisms and Chinese agricultural policies.

Price discovery in chinese agricultural futures markets: A comprehensive look

“…First, to the best of our knowledge, this is the first comprehensive study to explore price discovery of all actively traded agricultural commodity futures in China. Previous studies on Chinese commodity futures markets often only include a few agricultural commodities (e.g., Fung et al, 2003; Wellenreuther & Voelzke, 2019; Y. Xu et al, 2019; Yan & Reed, 2014) or one single agricultural futures market (e.g., Demir et al, 2019). Price discovery of actively traded agricultural commodities markets in China as a cross‐section have not yet been explored to provide a more complete picture with increased scientific rigor.…”

“…Specifically, the recursive cointegration analysis of Hansen and Johansen (1999) may allow us to examine how markets evolve as the Chinese futures markets become mature (Yang et al, 2012), and now it also can address more adequately the mixed evidence on the evolving lead‐lag relationship between cash and futures prices. The current application of the method is rather few in price discovery and also primarily limited to testing the time‐varying evolution of the cointegration relationships (e.g., X. Xu, 2018; Y. Xu et al, 2019; Yang et al, 2012), as most previous studies on price discovery still apply conventional cointegration analysis. Our improved recursive cointegration analysis sheds much new light on the price discovery performance of Chinese agricultural futures.…”

Risk analysis model and agricultural derivative market use

“…It is worth mentioning that several authors, including Cotter et al (2012), Xu et al (2019), Jiang et al (2016), Jia et al (2017), Assa (2015 and, Paris (2018) presented models for understanding and monitoring price variations, which will be discussed in the topic of risk analysis models of derivative markets.…”

“…Agricultural futures market participants are comprised of producers, sellers, processors, and import-exporters, as well as speculators, most of whom are familiar with commodity markets and able to expect future price trends from different perspectives (Xu et al ., 2019). Jiang et al (2016) made a comparison between the American future market and the Chinese one.…”

“…To that end, Cotter et al ( 2012), applied the Peaks-OverThreshold version of the Extreme Value Theory to estimate the measures of extreme financial risk for a selection of agricultural contracts. Xu et al (2019) highlight that the full functioning of the futures market is closely related to the vibrant spot trade; therefore, efficient price transmission creates a barrier between the future market and the spot market and has a critical effect on the functioning of the futures market, such as price discovery. To this end, the authors used the normal vector error correction (VECM), model.…”