Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures

Jędrzej Białkowski () and Jan Koeman
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Jędrzej Białkowski: University of Canterbury, https://www.canterbury.ac.nz

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: This study provides evidence of the importance of a well-defined and functioning spot market for the success of the associated futures market. The United States (US) spot market for nonfat dry milk has several distinct pricing indices, whereas the New Zealand (NZ) market has a single spot reference price. Our analysis of hedging effectiveness and hedge ratio persistence shows that none of the US spot market indices may be hedged effectively with the Chicago Mercantile Exchange nonfat dry milk futures at short hedging horizons, whereas the NZ Stock Exchange whole milk powder futures contract is an effective hedge for the Global Dairy Trade spot pricing benchmark. Four important dimensions of spot market design are identified – timeliness, market-based measurement, forward-spot separation, and inclusiveness.

Keywords: Agricultural Commodities, Hedging; Futures Market Effectiveness; Spot Market Design, Dairy, CME NFDM Futures, NZX WMP Futures, Settlement to Average Spot Price (search for similar items in EconPapers)
JEL-codes: G13 G14 Q14 Q17 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2017-12-01
New Economics Papers: this item is included in nep-agr and nep-des
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