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

See all articles by Leo H. Chan

Leo H. Chan

Woodbury School of Business, Utah Valley University

Donald D. Lien

University of Texas at San Antonio - College of Business - Department of Economics

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Abstract

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

Chan, Leo H. and Lien, Donald, Cash Settlement and Price Discovery in Futures Markets. Quarterly Journal of Business and Economics, Vol. 40, No. 2, pp. 65-77. Available at SSRN: https://ssrn.com/abstract=480521

Leo H. Chan (Contact Author)

Woodbury School of Business, Utah Valley University ( email )

Department of Finance and Economics
800 West University Parkway
Orem, UT 84058
United States
801-863-8428 (Phone)

Donald Lien

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States
210-458-4313 (Phone)
210-458-4308 (Fax)

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