Price Discovery Role of Futures Prices: A Linear Feedback Approach

Samarendu Mohanty and Darnell B. Smith

No 285675, 1981-1999 Conference Archive from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: This paper measures the degree of dependence between cash and futures prices for corn and soybeans using a linear feedback approach. The degree of dependence between these two series is decomposed into two directional and one contemporaneous feedback. These feedbacks are used to provide evidence of the price discovery role of futures price and also market efficiency. The feedback results suggest that the soybean futures market is more efficient than that of corn. Regarding the price discovery role of futures prices, one might argue for the price discovery role of corn futures, even though the directional feedback from futures to cash price was estimated to be only 5 percent. In the case of soybeans, the price discovery role of futures prices can only be argued if one can justify the causal ordering of contemporaneous feedback from futures to cash prices.

Keywords: Marketing (search for similar items in EconPapers)
Date: 1996-04
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Persistent link: https://EconPapers.repec.org/RePEc:ags:nc8191:285675

DOI: 10.22004/ag.econ.285675

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