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Price Discovery and Risk Transfer in the Crude Oil Futures Market: Some Structural Time Series Evidence
Author(s) -
Moosa Imad A.
Publication year - 2002
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/1468-0300.00077
Subject(s) - futures contract , price discovery , economics , crude oil , arbitrage , futures market , econometrics , series (stratigraphy) , financial economics , time series , function (biology) , elasticity (physics) , mathematics , statistics , thermodynamics , engineering , geology , paleontology , evolutionary biology , petroleum engineering , biology , physics
This paper re‐examines the Garbade and Silber (1983) model with the objective of finding out if the crude oil futures market performs the functions of price discovery and risk transfer. The model is estimated, using daily data, as a system of two seemingly unrelated time series equations allowing the coefficients to be time‐varying. The empirical results reveal that the futures market performs about 60 per cent of the price discovery function, and that the elasticity of supply of arbitrage services is adequately high for the market to perform the risk transfer function. (J.E.L: G13, C22).