Futures market is the significant part of modern economy with such essential functions as risk transfer and price discovery. However, whether it functions well or not is extremely related to the market efficiency.
A study of Futures market efficiency will provide the government and the market participants with important information to make full use of it. For the government, an efficient futures market is a good substitution of such market interventions as price stability policies; for the hedgers, an efficient futures market allows them to better manager the risks in produce and sale process, and then to make an optimal intertemporal allocation of limited resource; for the speculators, it is difficult for them to make an excess return through the transaction process in an efficient futures market. After the period of reorganization and experiment, China finally formed the three-major-futures-market distribution situation in 1998. I find it desirable to test the futures market efficiency of the time spread after 1998 because for one hand it offers an empirical measurement of the performance of the reform; and for the other hand it will provide the government and the market participants with some important information. Moreover, it will make a foundation of empirical study for the further development of China’s futures market.
There is a great deal of empirical work on futures market efficiency by foreign scholars who had incorporated the latest co-integration skill to test futures market simple efficiency hypothesis. However, domestic empirical studies on China’s futures market efficiency were mostly focused on the futures market weak-form efficiency hypothesis instead of simple efficiency hypothesis. So, there is little empirical study on China’s futures market simple efficiency.
I want to test these two conceptions of futures market efficiency. One is the weak-form market efficiency hypothesis, which is seriously relevant to the speculators for they care only about the fluctuations of futures price to make revenues; and the other is simple market efficiency hypothesis, which is seriously relevant to the hedgers who want to use the futures price as an index to make an optimal intertemporal allocation. The definition of the former is that current futures price reflects all the information included in the history futures price. The definition of the simple efficiency is that the futures price is the unbiasedness forecast of its corresponding future spot price.
I use series correlation method to test the weak-form futures market efficiency hypothesis and co-integration method to test the long-term relationship between futures and future spot price with three forecast horizons as two-months, one-month and two-week. Then I impose a restriction on the co-integration vector and adjustment vector to test futures market simple efficiency and exogenousity of future spot price. I will provide possible reasons on such testing results from the regulation of government, excess speculation, the exit of (time-varying) risk premium or the lack of rational expectation, or all of them.
A study of Futures market efficiency will provide the government and the market participants with important information to make full use of it. For the government, an efficient futures market is a good substitution of such market interventions as price stability policies; for the hedgers, an efficient futures market allows them to better manager the risks in produce and sale process, and then to make an optimal intertemporal allocation of limited resource; for the speculators, it is difficult for them to make an excess return through the transaction process in an efficient futures market. After the period of reorganization and experiment, China finally formed the three-major-futures-market distribution situation in 1998. I find it desirable to test the futures market efficiency of the time spread after 1998 because for one hand it offers an empirical measurement of the performance of the reform; and for the other hand it will provide the government and the market participants with some important information. Moreover, it will make a foundation of empirical study for the further development of China’s futures market.
There is a great deal of empirical work on futures market efficiency by foreign scholars who had incorporated the latest co-integration skill to test futures market simple efficiency hypothesis. However, domestic empirical studies on China’s futures market efficiency were mostly focused on the futures market weak-form efficiency hypothesis instead of simple efficiency hypothesis. So, there is little empirical study on China’s futures market simple efficiency.
I want to test these two conceptions of futures market efficiency. One is the weak-form market efficiency hypothesis, which is seriously relevant to the speculators for they care only about the fluctuations of futures price to make revenues; and the other is simple market efficiency hypothesis, which is seriously relevant to the hedgers who want to use the futures price as an index to make an optimal intertemporal allocation. The definition of the former is that current futures price reflects all the information included in the history futures price. The definition of the simple efficiency is that the futures price is the unbiasedness forecast of its corresponding future spot price.
I use series correlation method to test the weak-form futures market efficiency hypothesis and co-integration method to test the long-term relationship between futures and future spot price with three forecast horizons as two-months, one-month and two-week. Then I impose a restriction on the co-integration vector and adjustment vector to test futures market simple efficiency and exogenousity of future spot price. I will provide possible reasons on such testing results from the regulation of government, excess speculation, the exit of (time-varying) risk premium or the lack of rational expectation, or all of them.