Empirical Research On The Principle Function Of China's Futures Market

With the new kinds of futures commodities listed continually from the three futures exchanges in China, the futures market is going into a period of rapid development and prosperity, and it is necessary to research on the fundamental functions of the market.The author learns to know the futures market more clearly, according to a review of its actuality. And the paper researches the inherent connection between the increasing rate of GDP and futures volume by analyzing the macroeconomy and the futures market, which can help understand the background of its economy and policy. The result shows that there is a long-term equilibrium feedback between increasing rate of GDP and futures trade, and the increasing level of GDP leads that of volume of trade. A study on the relation between the spot price and the futures price reflects their degree of correlations, and the paper analyzes major factor that cash market effect futures price, which prepares for the research on the price discovery and hedging.The basic functions of the futures market are price discovery and hedging. For the first, the futures market becomes the core status of the market mechanism, and it provides much price information for the decision of the macroeconomy and activity of the microeconomy. The hedging function guarantees effectively the dilation of the economic scale. The international linkage of domestic futures market is derivative function of futures trade, and it reflects the information of futures price of different countries and intermarket.Applying unit root tests, vector autoregression, cointegration test, vector error corrected model, variance decomposition and impulse response function in the research on price discovery, the author finds that the function in the three futures exchanges exerts well, especially the copper and aluminum futures, then soybean and soybean meal, last corn and wheat. Unit root test shows the futures and the spot price of wheat, soybean, soybean meal, corn, copper and aluminium are nonstationary, but the difference of the price of the above six varieties are stationery's we can say that they are I (1) process. By Johansen cointegration test, the paper discloses that the trace statistics of the spot and futures prices are significant at the significance of 5%, so there exists only one cointegration equation, and there are long-term equilibrium relationship between the futures and cash price of the six goods. The six futures'price leads their spot price each other.Using variance decomposition, the author discovers that the futures market have dominant effect on the function of price discovery. In the copper market, 84.63% of the variance comes from the futures market comparing with the 15.36% of the spot market. For the aluminium, 77.63% of the variance comes from the futures, while 22.36% comes from the cash, the ratio are 56.95% and 43.05% in the soybean market, for soybean meal and corn, the data from futures are respectively 94.72% and 72.13%, the spot are 5.28% and 27.87%, in the wheat market, the values are 59.67% and 40.33%. In the analysis of impulse response functions, the price of the six varieties has much influence from the futures than the spot, which shows the dominant effect of price discovery in the futures market.Studing on the function of hedging, we discover that the ratio of hedging of nonferrous metal is bigger than that of agricultural and feedstuff products by using OLS, B-VAR, ECM and EC-GARCH.The best ratio of copper and aluminum are 0.94 and 0.90,and the performance are 58.93% and 75.84%. The optimal ratio of soybean meal, wheat, soybean and corn are 0.74, 0.28, 0.48 and 0.30, which have the value of performance 58.35%, 10.27%, 18.85% and11.40%. Ratios draw by applying ECM and EC-GARCH which considering the cointegration are better than that of normal regression model.By using index to weigh the hedging performance, the author draws that hedging can reduce the variance of profit effect so as to reduce risk of spot price. If ignores the cointeragtion connection between futures and cash price, we find that the value of performance will become bad without reference to the data of inside and outside the sample. In the inside, the performance of ECM and EC-GARCH is better than that of OLS and B-VAR. For outside the sample, the result of hedging using EC-GARCH is the optimal one of all the models. When studying the linkage between the domestic futures market and the others, the author makes use of unit root test, VAR, cointegration test, VEC, variance decomposition and impulse response function, and discloses that the futures prices of ZCE's and CBOT's wheat, DCE's and CBOT's soybean, SHFE's and LME's copper and aluminum are nonstationary, but the difference of these price are stationary, so can show that the series of the prices are I (1) process. By using Johansen cointegration test, we receive that the trace statistics of soybean, copper and aluminum are bigger than the value of cognizance level of 5% except wheat in Zhengzhou and in Chicago, so there exist one cointegration and long-term equilibrium relationship of the three products, and the prices of the three futures in China and foreign counties lead each other. The result from variance decomposition shows London's copper, aluminum and Chicago's soybean exert dominant effect on price discovery in international futures market. Thus there exist high international linkages between the three futures—copper, aluminum and soybean in domestic, London and Chicago, and there is weak connection between Zhengzhou's wheat and Chicago's.