Revisiting the relationship between spot and futures markets: evidence from commodity markets and NARDL framework

Hachmi Ben Ameur, Zied Ftiti () and Waël Louhichi
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Hachmi Ben Ameur: INSEEC Grande Ecole, INSEEC U
Waël Louhichi: ESSCA School of Management

Annals of Operations Research, 2022, vol. 313, issue 1, No 8, 189 pages

Abstract: Abstract This study aims to investigate the relationship between the spot and futures commodity markets. Considering the complexity of the relationship, we use a nonlinear autoregressive distributed lag (NARDL) framework that considers the asymmetry and nonlinearity in both the long and short run. Based on the daily returns of six commodity indices reaggregated on three commodity types, our study reaches some interesting findings. Our analysis highlights a bidirectional relationship between both markets over the short and long run, with a greater lead for the futures market. This result confirms the future market’s dominant contribution to price discovery in commodities. Changes in commodity prices appear first in the futures market, as informed investors and speculators prefer trading on this market that is characterized by low costs and a high-leverage effect. Then, the information is transmitted from the futures to the spot market through arbitrageurs’ activity, which explains the nonlinearity of the relationship. These results are helpful to scholars, investors and policymakers.

Keywords: Commodity markets; NARDL; Spot market; Futures market; Lead–lag relationship (search for similar items in EconPapers)
JEL-codes: C58 G1 Q02 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s10479-021-04172-3

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