scholarly journals Analysis of Long-Term Relationship between Spot and Futures prices Using Johansen’s Test of Cointegration

2011 ◽  
Vol 2 (2) ◽  
pp. 65-80
Author(s):  
Sathya Swaroop Debasish
Keyword(s):  
Spot Price ◽  
Futures Prices ◽  
Spot Prices ◽  
Econometric Methods ◽  
Price Series ◽  
Augmented Dickey Fuller ◽  
National Bank ◽  
Difference Form ◽  
Adf Test

The main objective of the study is to examine the long-term relationship between spot prices and futures prices A. The study has used daily prices (closing, opening, high and low) in both spot market and futures market for the 40 sample individual stocks drawn from six leading sectors namely, Automobiles, Banking, Cement, Gas, Oil & Refineries, Information Technology and Pharmaceutical. The period of study is from 1st January 1997 to 31st May 2009. The study begins by testing the stationarity of the spot price series and futures price series using two econometric methods namely, Philips Perron (PP) test and Augmented Dickey-Fuller (ADF) test. The long term relationship between spot prices and futures prices is statistically tested using Johansen’s test of Cointegration employing likelihood Ratio (L.R.), under the hypothesis that there exists a single cointegration equation between spot and future prices. It is found that both spot prices and futures prices for the selected companies are not stationary in the level form, but there is evidence of stationarity in the first difference form. The study finds a single long-term relationship for each of the selected companies across the six sectors. Among the selected companies in each sector, those evidencing strongest relation in respective sector are Tata Motors, Punjab National Bank, Gujrat Ambuja Cements, Bongaigaon Refineries, I-Flex and GLAXO Pharma.

Pricing of Futures Contracts

2018 ◽  
Author(s):  
Timothy A. Krause
Keyword(s):  
Fair Value ◽  
Commodity Futures ◽  
Futures Contracts ◽  
Spot Price ◽  
Futures Prices ◽  
No Arbitrage ◽  
Spot Prices ◽  
Cost Of Carry ◽  
Contract Expiration ◽  
The Cost

This chapter examines the relation between futures prices relative to the spot price of the underlying asset. Basic futures pricing is characterized by the convergence of futures and spot prices during the delivery period just before contract expiration. However, “no arbitrage” arguments that dictate the fair value of futures contracts largely determine pricing relations before expiration. Although the cost of carry model in its various forms largely determines futures prices before expiration, the chapter presents alternative explanations. Related commodity futures complexes exhibit mean-reverting behavior, as seen in commodity spread markets and other interrelated commodities. Energy commodity futures prices can be somewhat accurately modeled as a generalized autoregressive conditional heteroskedastic (GARCH) process, although whether these models provide economically significant excess returns is uncertain.

The Unbiasedness and Hedging Effectiveness in KOSPI200 Futures Market

2007 ◽  
Vol 15 (1) ◽  
pp. 73-100
Author(s):  
Seok Kyu Kang
Keyword(s):  
Risk Management ◽  
Risk Premium ◽  
Futures Market ◽  
Spot Price ◽  
Sample Period ◽  
Futures Prices ◽  
Spot Prices ◽  
Hedging Effectiveness ◽  
Futures Price ◽  
Rolling Windows

This study is to examine the unblasedness hypothesis and hedging effectiveness in KOSPI20() futures market. The unbiasedness and efficiency hypothesis is carried out using a cointegration methodology. And hedging effectiveness is measured by comparing hedging performance of the naive hedge model, OLS hedge model. and constant correlation bivariate GARCH (1. 1) hedge model based on rolling windows. The sample period covers from May. 3. 1996 to December. 8, 2005. The empirical results are summarized as follows: First, there exists the cOintegrating relationship between realized spot prices and futures prices of the 10 day. 22 day. 44 day. and 59 day prior to maturity. Second. futures prices of backward the 10 day. 22 day. 44 day from maturity provide unbiased forecasts of the realized spot prices. The KOSPI200 futures price is likely to predict accurately future KOSPI200 spot prices without the trader having to pay a risk premium for the privilege of trading the contract. Third. for shorter maturity. the futures price appears to be the best forecaster of spot price. Forth, bivariate GARCH hedging effectiveness outperforms the naive and OLS hedging effectiveness. The implications of these findings show that KOSPI200 futures market behaves as unbiased predictor of future spot price and risk management instrument of KOSPI200 spot portfolio.

Investigation of the price linkage between Asian LNG spot and Far East Asian LNG prices and its implications

2018 ◽  
Vol 1 (1) ◽  
pp. 52-65
Author(s):  
Muhammad Anas Pradipta
Keyword(s):  
Natural Gas ◽  
Unit Root ◽  
East Asian ◽  
Far East ◽  
Unit Root Tests ◽  
Spot Prices ◽  
South Korean ◽  
Natural Gas Prices ◽  
Augmented Dickey Fuller

For so many times, Far East Asian liquid natural gas (LNG) buyers have been using price linked to crude oil-indexed, now they need to find another alternative pricing formula for their crucial energy supply as a better price structure that could reflect the market is needed. LNG spot price is expected to be the pillar for the future LNG trading, especially for Far East Asia Market. As less and less long-term contracts are signed in the Far East Asia Market, this creates an additional demand for the LNG in the spot market, while it raises some issues about the presence of different LNG pricing mechanisms. Most of the LNG spot prices in Asia are indexed to the relatively low natural gas prices in Atlantic Basin. Furthermore, the advancement of drilling technology in the US drives down its natural gas prices, resulting in price discrepancies between Asian LNG spot and East Asian LNG prices. This study investigates whether there is a price linkage between Asian LNG spot and East Asian LNG prices. This study comprehends 91 observations collected from January 2010 to July 2017. Johansen co-integration tests were carried out to examine the existence of long-run relationship on the spot, Japanese and South Korean LNG prices. The Augmented Dickey-Fuller (ADF), Phillip-Perron (PP), and Kwiatkowski-Phillips-Schmidt-Shin (KPSS) unit root tests were conducted first before proceeding to the co-integration tests. The results showed that Asian LNG spot prices did not have price linkage for monthly averages of Japanese and South Korean LNG prices. The analyses also indicated that Taiwan LNG markets move together with Asian LNG spot markets. As a conclusion, the results inferred that supply dependency on LNG spot cargoes governed the price linkage among these Asian LNG markets. The use of gas indexed LNG price mechanism did not reflect the economic fundamentals in Asia-Pacific Basin. JEL Classification: Q41Keywords: Price linkage, Johansen co-integration, augmented Dickey-Fuller, Phillip-Perron, and Kwiatkowski-Phillips-Schmidt-Shin, unit root tests, Far East Asian LNG spot prices, LNG spot and short-term cargoes, long-term contracts, spot prices, energy: demand and supply, prices

A Phasewise Empirical Analysis of Relationship between Indian Spot and Future Prices of Gold

2015 ◽  
Vol 8 (2) ◽  
Author(s):  
Harsh Purohit ◽  
Dr. Vibha Dua Satija ◽  
Haritika Sabharwal Chhatwal ◽  
Himanshu Puri
Keyword(s):  
Structural Break ◽  
Wald Test ◽  
Future Price ◽  
Futures Prices ◽  
Crisis Period ◽  
Price Series ◽  
Long Run ◽  
Integration Test ◽  
Break Points ◽  
Adf Test

The study investigates the relationship between the spot and the futures prices of gold commodity. The objectives of the study are examined by employing Chow test to check structural break points in prices data, ADF test to check the stationarity, Johansen Co-integration test for studying the long term relationship, and Granger causality Wald test to know the cause and effect relationship between spot and the future prices of gold. The daily closing data is taken from 1st May 2005 to 31st December 2012 for the analysis. Since the period of financial crisis is considered, the entire period (May 2005- December 2012) is divided into three sub-periods, namely before crisis period (May 2005-August 2008), during crisis (September 2008- December 2010) and after crisis period (January 2011- December 2012). The findings of the study proved that there are structural break points in the specified data and the series derived from the futures prices and cash market prices for gold were not stationary in the level form, but there is evidence of stationarity in the first difference form. Long run relationship between the spot and future price series is also observed. Empirical results also found the existence of uni-directional causality from spot return to futures return for before crisis and after crisis period. For the period during crisis, there is bi- directional feedback from futures return to spot return and from spot return to futures return.

Are the Indian Ragi Markets Integrated?

2021 ◽  
Keyword(s):  
Market Integration ◽  
Tamil Nadu ◽  
Return To Equilibrium ◽  
Price Series ◽  
Long Run ◽  
Short Run ◽  
Adf Test ◽  
Bidirectional Flow ◽  
Flow Of Information

The Indian consumers and policymakers recognized finger millet (Ragi) increasingly as a nutritious staple. Karnataka, Uttrakhand, Maharashtra, and Tamil Nadu are the major ragi producing States contributing 90 percent of the Indian Ragi production. Various initiatives in recent years have aimed at promoting agricultural market integration. The present study aimed at testing the integration across the ragi markets in Tamil Nadu. The ADF test was used to assess the stationarity, Johansen cointegration, and the VECM model was used to analyze the long-term cointegration among the markets. Granger causality was used to assess the direction of the flow of information across markets. All the price series were first difference stationary. There existed two cointegration equations depicting the long-term integration across the markets. In the majority of the selected markets, a bidirectional flow of information was observed. Chinthamani and Tumkur markets error correction coefficients were significant, indicating that they will return to equilibrium in the short run by making corrections. Chinthamnai price influenced the Tumkur, Hosur, and Denkanikottai price at one month lag. The Tumkur price was influenced by its one-month lag and Hosur and Vellore one-month lag price. Tumkur and Vellore influence Hosur price by one month lag. The analysis found that Indian ragi markets were integrated in the long run.

Evaluation of U.S. southern pine stumpage market informational efficiency

2003 ◽  
Vol 33 (4) ◽  
pp. 561-572 ◽  
Author(s):  
Jeffrey P Prestemon
Keyword(s):  
Selection Procedure ◽  
Informational Efficiency ◽  
Price Behavior ◽  
Southern Pine ◽  
Price Series ◽  
Augmented Dickey Fuller ◽  
Using Data ◽  
Pinus Spp ◽  
Timber Markets

The literature on informational efficiency of southern timber markets conflicts. Part of this conflict is because of differences in how efficiency was tested. In this paper, price behavior tests are based on deflated ("real") southern pine (Pinus spp.) sawtimber stumpage prices, using some of the same data and tests used in previous research and some new data and tests. Here, different results are found in many cases regarding price behavior, as compared with the existing literature. Using a valid and consistent data-based model selection procedure, augmented Dickey–Fuller tests cannot reject a null of a unit root for most deflated monthly and all quarterly southern pine timber price series evaluated. Regressions of long-term deflated timber price ratios on their own lags lead to results similar to those offered by other authors when not corrected for bias but produce fewer similarities when bias is addressed. The results of those regressions support a contention that most of the monthly series contain nonstationary as well as stationary components and that quarterly prices tested in this framework using data through 2001 are closer to pure nonstationary processes. These results have implications for harvest timing approaches that depend on serial dependence of timber prices, provide support for certain kinds of policy and catastrophic shocks modeling procedures, and address the validity of statistical approaches best suited to evaluating interconnections among timber markets.

scholarly journals Gold futures prices: An investigation into the theories of storage and forecast power and premium

1990 ◽  
Vol 21 (1/2) ◽  
pp. 1-6
Author(s):  
M. J. Page
Keyword(s):  
Interest Rates ◽  
Futures Contracts ◽  
Dominant Factor ◽  
Spot Price ◽  
Futures Prices ◽  
Short Term ◽  
Spot Prices ◽  
The Difference ◽  
Gold Futures ◽  
Theory Of Storage

There are two principal theories of commodity futures prices. The theory of storage, which explains the difference between contemporaneous futures and spot prices (the basis) in terms of interest rates, warehousing costs, and convenience yields, and the theory of forecast power and premium, which is based on the assumption that the futures price is a biased estimate of the expected spot price. This research paper examines the applicability of the two theories to the pricing of short term gold futures contracts. The findings suggest that, in terms of the theory of storage, the basis variability is explained principally by interest rate changes for contracts of between three and six months duration, while for one-month contracts varying convenience yields appear to be the dominant factor. The low basis variability of gold futures contracts results in inconclusive findings with respect to the theory of forecast power and premium. There is, however, evidence to suggest that the basis contains some ability to predict the expected premium or bias.

scholarly journals Commodity Price Forecasts, Futures Prices, and Pricing Models

2019 ◽  
Vol 65 (9) ◽  
pp. 4141-4155 ◽  
Author(s):  
Gonzalo Cortazar ◽  
Cristobal Millard ◽  
Hector Ortega ◽  
Eduardo S. Schwartz
Keyword(s):  
Term Structure ◽  
Commodity Price ◽  
Futures Prices ◽  
Pricing Models ◽  
Medium Term ◽  
Oil Futures ◽  
New Approach ◽  
Commodity Pricing ◽  
Spot Prices

Even though commodity-pricing models have been successful in fitting the term structure of futures prices and its dynamics, they do not generate accurate true distributions of spot prices. This paper develops a new approach to calibrate these models using not only observations of oil futures prices, but also analysts’ forecasts of oil spot prices. We conclude that to obtain reasonable expected spot curves, analysts’ forecasts should be used, either alone or jointly with futures data. The use of both futures and forecasts, instead of using only forecasts, generates expected spot curves that do not differ considerably in the short/medium term, but long term estimations are significantly different. The inclusion of analysts’ forecasts in addition to futures, instead of only futures prices, does not alter significantly the short/medium part of the futures curve but does have a significant effect on long-term futures estimations. This paper was accepted by Gustavo Manso, finance.

Relationship between Coffee Prices in Spot and Futures Markets-An Empirical Analysis

2020 ◽  
pp. 180-188
Keyword(s):  
New York ◽  
Correlation Coefficients ◽  
Strong Relationship ◽  
Futures Market ◽  
Regression Coefficients ◽  
Futures Prices ◽  
Market Prices ◽  
Spot Prices ◽  
Correlation And Regression Analysis ◽  
Highly Correlated

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.

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