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An analysis of time-varying commodity market price discovery

Paresh Kumar Narayan and Susan Sunila Sharma

International Review of Financial Analysis, 2018, vol. 57, issue C, 122-133

Abstract: We propose a model of time-varying price discovery based on a rolling-window error correction framework. We show that price discovery in nine commodities is dominated by the spot market, while, in only six commodities, price discovery is dominated by the futures market. Our findings, therefore, challenge the well-established view in commodity markets that it is the futures market which dominates the price discovery process. We also show the economic significance of price discovery through a portfolio construction and hedging strategy.

Keywords: Price discovery; Time-varying; Error correction model; Spot and futures markets (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:finana:v:57:y:2018:i:c:p:122-133