Research On China's Futures Contract Price Discovery Function Of Linear Low Density Polyethylene

Since the Zhengzhou Commodity Exchange was established, our country has started an extraordinary journey to develop a health and perfect futures market. After 20 years'governance and consolidation, we have got initial success. However, comparing with other futures markets, ours has less diversity which curbs the demand of hedging and hiding from risk, furthermore, stops our futures market playing its role.The primary function of futures market is hedging and price discovery, and between which price discovery is most valued by the market. Price discovery function reflects the real demand and supply relationship in markets, reveals the trend of prices changes and predicts spot price. Because of its delay, uncertainty and incompleteness in the price formation mechanism, spot market has limitations and can not make full use of market information and is less efficient; while futures markets provide a continuous assessment of supply and demand factors and other markets'indicators for buyers and sellers, assembles a large concentration of factors influencing supply and demand, so futures prices are expected to be predictability, continuity, openness and competitiveness. Futures price is considered to be the real price, and the true expression of the idea of the market.Foreign scholars have been studying the price discovery function of futures markets all the time. Working thought that price discovery was using futures price to price assets'spot prices, revealing all of the information and permanent value. Koppenhaver regarded the efficiency of futures market was that futures prices can show all the known information in the markets and prices obtained form these information is fair and competitive; in the futures contract expires, futures prices and spot prices should be consistent. Garbade and Silber built GS model which shows futures price and spot prices'contributions in price discovery respectively. There are two ways to study price discovery, one is Information Share(IS) of Hasbrouck, the other is Permanent-Transitory decomposition(PT) of Gonzalo and Granger. As for the empirical test, people mainly use two methods to test price discovery function, one of which is to test lead-leg relationship and the other is for volatility spill-overs effect.At present the researches about our futures market always focus on soy bean and non-ferrous metals, little on chemical products. And there is no any study about Linear Low Density Polyethylene (LLDPE) future. LLDPE future was the first chemical products future; therefore, it is significant for our futures market. This paper tries to find the relationship between future price and spot price of LLDPE and reveal that whether or not futures market of LLDPE achieves price discovery and its contribution.This paper applies ADF,Impulse Response,ECM,Cointegration test,Granger causality test and Variance decomposition to futures market and spot market of LLDPE. Indeed, these two markets have long-term equilibrium relationship, and exists Granger one-way leading relationship from future market to spot market. Future market plays an important role in price discovery, which accounts for 92.36% in the function of price discovery while the spot market contributes 7.64%. As a result, price discovery performs well in LLDPE's future market, and spot price of LLDPE can be predicted by its future price.