Forward Market Equilibrium

ABSTRACTThis study examines the Fish Pool salmon futures contract with respect to how well the market performs in terms of the futures price being an unbiased estimator of the spot price and whether the market provides a price discovery function. Using data for 2006–2014 and with futures prices with maturities up to 6 months we find that spot and lagged futures prices are cointegrated and that the futures price provides an unbiased estimate of the spot price. We also find that, with the exception of the front month, that the causality is one-directional. The spot prices lead futures prices between 1–6 months maturity. Hence, while the spot and lagged futures prices are unbiased estimates, we do not find support for the hypothesis that futures prices provide a price discovery function. Rather, it seems that innovations in the spot price influence futures prices. This finding is not uncommon in new and immature futures contracts markets. Hence, the salmon futures market is still immature and has not yet reached the stage where futures prices are able to predict future spot prices.

Unbiased Estimation, Price Discovery, and Market Efficiency: Futures Prices and Spot Prices

By means of a data set previously unavailable for academic research, actual trading histories of individual futures traders are examined. With this more detailed data, the author is able to (1) test the risk/return hypothesis directly; (2) include a much larger segment of the market than before; and (3) use actual instead of hypothetical t rading strategies. It is shown that the commercial (hedging) traders are most profitable, while noncommercial (speculative) traders earn n egative or zero profits. Because speculators are not receiving reward s for the risks they willingly absorb, the theory of normal backwarda tion and its extension can be rejected. Copyright 1987 by University of Chicago Press.

The present study explored the relationship between spot and futures coffee prices. The Correlation and Regression analysis were carried out based on monthly observations of International Coffee Organization (ICO) indicator prices of the four groups (Colombian Milds, Other Milds, Brazilian Naturals, and Robustas) representing Spot markets and the averages of 2nd and 3rd positions of the Intercontinental Exchange (ICE) New York for Arabica and ICE Europe for Robusta representing the Futures market for the period 1990 to 2019. The study also used the monthly average prices paid to coffee growers in India from 1990 to 2019. The estimated correlation coefficients indicated both the Futures prices and Spot prices of coffee are highly correlated. Further, estimated regression coefficients revealed a very strong relationship between Futures prices and Spot prices for all four ICO group indicator prices. Hence, the ICE New York (Arabica) and ICE Europe (Robusta) coffee futures prices are very closely related to Spot prices. The estimated regression coefficients between Futures prices and the price paid to coffee growers in India confirmed the positive relationship, but the dispersion of more prices over the trend line indicates a lesser degree of correlation between the price paid to growers at India and Futures market prices during the study period.

The relationship between spot and futures prices in the Nord Pool electricity market

This paper examines the impact of speculation on commodity and food futures on spot prices. Econometric studies contradict each other, coming not to a clear empirical outcome. Therefore, we take an alternative methodological approach with two behavioral experiments. The outcome shows, that tendencies in futures prices influence the price-setting behavior of market players in the spot market in the same direction. Since futures prices had no direct influence on profits and there were no other influences, futures prices must have influenced the expectations of market participants psychologically. Speculation with futures prices thus has an influence on spot prices via expectations. When speculation involves commodities and food in the future market serving crucial real economic functions it can lead to substantial misallocations and damages, why speculation should be regulated.

OVER THE PAST THIRTY YEARS OR SO, the problem of the stability of a competitive general equilibrium system has been extensively studied by many economists. The first efforts at formulating the problem date back to Hicks [10], though it is well known that his analysis was purely static in nature. Taking off from Hicks' work, a number of authors (e.g., Samuelson [18], Metzler [14]) considered the dynamic stability of a linearized general equilibrium system and related their stability conditions to those obtained by Hicks. More recently, the stability of nonlinear general equilibrium systems has received a good deal of attention, and this more modern treatment originated primarily with the work of Arrow and Hurwicz [1].1 While these works indicate very clearly that major advances have been achieved in the study of stability, they all suffer from one serious defect in that they do not permit stochastic elements to be present. Therefore, the objective of the present paper is to introduce random shocks into a general equilibrium model and to investigate the resulting stability properties of such a system. This is obviously an important extension of the theory since random disturbances can enter the system in a number of ways, and in doing so possibly introduce destabilizing elements. For example, both the supply and demand functions may be subject to random shifts both in position and slope due to unforeseen exogenous factors such as changes in taste or technological uncertainties. Alternatively, the random element may be introduced because the process tatonnment which describes the adjustment to equilibrium (to be described presently) does not hold exactly. We shall interpret our results from both these standpoints. When confronted with the task of making choices in a world which is both dynamic and stochastic, individual decision makers will tend to base their behavior not only on current values of relevant variables, but also on their expected future values. For example, their expectations concerning future price movements are likely to be a very important determinant of their actions during the current period, since they will indicate how desirable it is to make a particular purchase now rather than later. Furthermore, since the current price is only a short run market equilibrium, it is quite likely to change in response to random disturbances and cannot be relied upon to provide accurate information about what future equilibrium prices are likely to be. Hence we shall assume that the excess demand functions (to be introduced in Section 2) depend on both current and expected future prices. In

In this paper the efficiency of the stock index futures market and the underlying spot market is investigated over the period January 2, 1996 to June 29, 2001. In addition to examining the whole data set, the sample was also divided into four subsamples, each of which was analysed independently. The four subsamples included a pre-crisis or tranquil period, a crisis period, a transition period and, finally, a post-crisis period. The crisis period spans the time of the Asian financial crisis whereas the transition period incorporates two events which may have impacted on market efficiency - the Russian ruble crisis and the South African rand crisis. We tested for unit roots, market cointegration and Granger causality with vector error correction and found that the two markets were relatively inefficient during the pre-crisis period but that efficiency improved following the onset of the crisis. The futures market proved to be the dominant market in the long-run during all four subsample periods since it was primarily responsible for maintaining its equilibrium relationship with the underlying spot market. Over the short-term, the futures return was found to lead or Granger-cause the spot return during the pre-crisis period, but this was reversed during the crisis period. No short-term causality relationship could be detected for the transition and post-crisis periods. Futures prices are expected to lead spot prices because of lower transaction costs and less restrictive short-selling in the futures market. We speculate that the anomaly, i.e., the spot price lead, during the crisis period reflect investor behaviour during times of uncertainty and distress when more value is attached to the underlying asset than to past performance or future prospects of the derivative instrument.

Analyzing the dynamics between crude oil spot prices and futures prices by maturity terms: Deep learning approaches to futures-based forecasting

This article investigates the role of price discovery in the Indian stock market by taking into consideration 41 individual securities and Nifty. The present article reports a study based on the daily adjusted closing price of spot and futures for the time period between June 2000 and August 2010 (index) and from November 2001 to August 2010 (individual stocks). To analyze the price discovery role, Engle and Granger’s Residual Based approach, Johansen’s cointegration test and VECM (Vector Error Correction Model) are used. The results depict that futures price series leads the spot price series in case of Nifty and 21 stocks, and 20 stocks’ future price series is led by spot price series. As far as causality is concerned, 14 stocks show feedback causality, 21 stocks including Nifty show unilateral causality and 7 stocks show absence of causality. This study also finds that both the markets, i.e., futures and spot, play an important price-discovery role, implying that futures (spot) prices may contain useful information about spot (futures) prices.

The Consequence of Volatility Index on Stock Market Returns

Strategic Trading, Welfare and Prices with Futures Contracts

In recent years, the rapid increase in CO2 concentration has accelerated global warming. As a result, sea levels rise, glaciers melt, extreme weather occurs, and species become extinct. As the world’s largest CO2 emission rights trading market, EU Emissions Trading System (EU-ETS) has reached 1.855 billion tons of quotas by 2019, influencing the development of the global carbon emission market. Crude oil, as one of the major fossil energy sources in the world, its price fluctuation is bound to affect the price of carbon emission rights. Therefore, this paper aims to reveal the correlation between crude oil futures prices and carbon emission rights futures prices by studying the price fluctuation. In this paper, the linkage between West Texas Intermediate (WTI) crude oil futures prices and European carbon futures prices was investigated. In addition, this paper selects continuous data of WTI crude oil futures prices and spot prices with European carbon futures prices from January 8, 2018 to November 27, 2020, and builds a smooth transformation regression (STR) model. The relationship between crude oil futures and carbon futures prices is studied in both forward and reversal linkage through empirical analysis. The results show that crude oil futures prices and carbon futures prices have a mutual effect on each other, and both linear and nonlinear correlations between the two prices exist. Based on the results of this research, some suggestions are provided.

There is a strong connection between the Federal Reserve’s monetary policy and the trend of international food prices. Employing the average information share model, EGARCH(Exponential Generalized Autoregressive Conditional Heteroskedasticity), and DCC-MGARCH(Dynamic Conditional Correlation-Multivariate Generalized Autoregressive Conditional Heteroskedasticity) models, this study investigates the relationship between the U.S. dollar index, international grain futures prices, and spot prices in the context of Federal Reserve monetary policy adjustments from 2000 to 2023. The findings reveal that, first, under conditions of long-run cointegration, the U.S. dollar index exerts a strong pricing influence over international grain futures, while grain futures demonstrate a significant price discovery function over spot prices. Second, both international grain futures and spot markets exhibit asymmetric volatility, with price increases being more pronounced than decreases in response to external shocks. Additionally, the U.S. dollar index has a unidirectional and inverse influence on grain futures prices, while futures and spot prices interact bidirectionally and move in the same direction. This paper contributes to understanding the impact of Federal Reserve monetary policy adjustments on international food prices and offers policy insights for countries to manage food import risks and maintain price stability.

This work discusses the possibility, or rather the effectiveness, of the use of agricultural futures as a means of hedging to minimize exposure to price risk. In particular, the analysis refers to "low-development countries" (LDCs), countries in which agricultural products play a prominent role and in which the process of market liberalization, which took place following the removal of state intervention, is determining an increasing exposure to price volatility. Knight's uncertainty is said to make both producers and speculators more risk averse, hence more conservative. In particular, when the futures price is well above the expected spot price (adjusted for the Knightian uncertainty), the optimal position for the producer is a total hedge of his production, while the optimal position for the speculator consists in not operating at all in the market. We can limit ourselves to observing that if a single producer and a single speculator operate in the market, the equilibria that can be reached are three: of complete exchange, of non-exchange and of partial exchange. The possibility of obtaining one of the three equilibria depends on the degree of risk aversion and the degree of Knightian uncertainty possessed by each of the two different subjects. Access to the capital market is a crucial element for the development of agriculture, both in the start-up phase and in the improvement phase. The search for new capital and new tools to facilitate market access requires a high degree of trust on the part of financial market operators, a trust that is often compromised by the low profitability of loans and the high risk associated with them. The exposure to risk of agricultural activities limits, in fact, the interest of traditional finance, reducing the availability of capital to the few remaining resources within the sector itself after the flight to more attractive alternative uses. Hence the need to introduce new financial and insurance techniques and services, such as to guarantee the agricultural sector the capital necessary for growth and, at the same time, attractive return opportunities for investors. Specifically, it is stated that one of the most profitable paths to follow in this regard is implementation within all EU member states of particular agricultural reforms that introduce risk management techniques in agriculture already successfully implemented by the U.S.A.1