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Revisiting the relationship between spot and futures markets: evidence from commodity markets and NARDL framework

Author

Listed:
  • Hachmi Ben Ameur

    (INSEEC Grande Ecole, INSEEC U)

  • Zied Ftiti

    (EDC Paris Business School)

  • Waël Louhichi

    (ESSCA School of Management)

Abstract

This study aims to investigate the relationship between the spot and futures commodity markets. Considering the complexity of the relationship, we use a nonlinear autoregressive distributed lag (NARDL) framework that considers the asymmetry and nonlinearity in both the long and short run. Based on the daily returns of six commodity indices reaggregated on three commodity types, our study reaches some interesting findings. Our analysis highlights a bidirectional relationship between both markets over the short and long run, with a greater lead for the futures market. This result confirms the future market’s dominant contribution to price discovery in commodities. Changes in commodity prices appear first in the futures market, as informed investors and speculators prefer trading on this market that is characterized by low costs and a high-leverage effect. Then, the information is transmitted from the futures to the spot market through arbitrageurs’ activity, which explains the nonlinearity of the relationship. These results are helpful to scholars, investors and policymakers.

Suggested Citation

  • Hachmi Ben Ameur & Zied Ftiti & Waël Louhichi, 2022. "Revisiting the relationship between spot and futures markets: evidence from commodity markets and NARDL framework," Annals of Operations Research, Springer, vol. 313(1), pages 171-189, June.
    • Handle: RePEc:spr:annopr:v:313:y:2022:i:1:d:10.1007_s10479-021-04172-3
    DOI: 10.1007/s10479-021-04172-3
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    More about this item

    Keywords

    Commodity markets; NARDL; Spot market; Futures market; Lead–lag relationship;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G1 - Financial Economics - - General Financial Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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