The Information Transmission between China and the US Agricultural Commodity Markets

45 Pages Posted: 20 Aug 2015

See all articles by Di Mo

Di Mo

RMIT University

Rakesh Gupta

Griffith University - Griffith Business School; CQ University; Association of Personal Finance and Investments

Date Written: August 19, 2015

Abstract

This study examines both long-run and short-run linkages between futures and spot prices for a wide range of agricultural commodities in China and the US. We use the Johansen cointegration test to examine the long-run equilibrium relationship in both multivariate and bivariate contexts. The VECM model is used to examine the information transmission in the short-run. Finally, we use Granger causality test to investigate how the information transmission pattern changes under different economic conditions.

We find long-run equilibrium relationships between spot and futures prices in the Chinese markets, as well as the futures prices in China and the US. The long-run relationship is consistent with the LOP theory, which indicates that prices of identical assets in different markets should have the same stream of future cash flows after all adjustments. The short-run analyses show the robust bidirectional relationship between futures and spot prices in China, and the futures prices in China and the US. The findings indicate that Chinese agricultural commodity futures played a significant role in the global commodity futures markets. The GFC subsample results are mixed. In general, the domestic information becomes more important compared to the information in the international markets during the crisis and post crisis periods. Whereas, the US futures markets play important price discovery role than Chinese ones during and after crisis in the bivariate context.

The findings of this study contribute to the existing literature on information transmission in agriculture commodity markets in the emerging nations by including the futures markets in China and the futures markets of USA, which is a global dominant market. Study also includes the underlying asset market to provide the relationship among all three asset markets. The findings of this study may have important implication for policy makers in emerging markets who seek to develop policies for stability of the commodity prices.

Keywords: Futures, agricultural commodities, long-run relationship, short-run relationship

JEL Classification: G15, Q14

Suggested Citation

Mo, Di and Gupta, Rakesh, The Information Transmission between China and the US Agricultural Commodity Markets (August 19, 2015). Available at SSRN: https://ssrn.com/abstract=2647773 or http://dx.doi.org/10.2139/ssrn.2647773

Di Mo (Contact Author)

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia
0399255250 (Phone)

Rakesh Gupta

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia
+61 7 37357593 (Phone)
+61 7 3735 3719 (Fax)

CQ University ( email )

B-33, G-26
Fabie
North Rockhampton, QLD 4701
Australia
+61 7 4930 9158 (Phone)

Association of Personal Finance and Investments

Bruce Highway
Rockhampton
Australia
61749309158 (Phone)

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