Cash Settlement and Price Discovery in Futures Markets
Quarterly Journal of Business and Economics, Vol. 40, No. 2, pp. 65-77
Posted: 17 Dec 2003
In this paper, we examine how cash settlement affects the ability of the futures market to predict future spot prices. Adopting the Geweke feedback measure, we find that the feeder cattle futures contract improves its price discovery function after the cash settlement was adopted in August 1986. Moreover, spot and futures markets become more integrated thereafter. We also consider the case in which the cash settled lean hog futures contract replaced the physical delivery settled live hog futures contract in December 1996. Herein the conclusion is drastically different. After cash settlement was adopted, the futures market is less effective in price discovery. Further, spot and futures markets are more segmented.
Note: This is a description of the paper and not the actual abstract.
Keywords: Price Discovery Function, Futures Markets, Geweke Measures, Cash Settlement
JEL Classification: G14, Q11, C32
Suggested Citation: Suggested Citation