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Arbitrage, cointegration, and the joint dynamics of prices across discrete commodity futures auctions
Author(s) -
Low Aaron H. W.,
Muthuswamy Jayaram,
Webb Robert I.
Publication year - 1999
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/(sici)1096-9934(199910)19:7<799::aid-fut4>3.0.co;2-5
Subject(s) - futures contract , arbitrage , cointegration , economics , common value auction , financial economics , index arbitrage , contango , commodity , monetary economics , risk arbitrage , econometrics , microeconomics , arbitrage pricing theory , finance , capital asset pricing model
Underlying the search for arbitrage opportunities across commodity futures markets that differ in market structure is the idea that the futures prices for similar commodities that are traded on different exchanges adjusted for differences in currency, delivery time (if any), location, and market structure are equal. This article examines price linkages in competing discrete commodity futures auction markets. We find no evidence of cointegration of futures prices of similar commodities traded on two contemporaneous discrete auction futures exchanges in Asia. We also find no evidence of arbitrage activities across these two Asian exchanges, though this does not preclude arbitrage activities with North American continuous auction markets. This lack of cointegration may be due to nonstationarities in the trading cost component. © 1999 John Wiley & Sons, Inc. Jrl Fut Mark 19: 799–815, 1999