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Arbitrage using Soya Bean and Soya meal futures contract Evidence from Dalian Commodity Exchange, China

Author(s)

Thian Cheng Lim , Zhengjiang Hu , Ruiyang Chai ,

Download Full PDF Pages: 45-53 | Views: 400 | Downloads: 116 | DOI: 10.5281/zenodo.3386686

Volume 1 - August 2012 (08)

Abstract

We investigate the price discovery process among the futures prices of soybean and soya meal contracts in the Dalian Commodity Exchange. Granger Causality Test, Co-integration Test and Error Correction Model (ECM) will be used to measure soybean, and soybean meal future price. If the two commodities’ future price have strong relationship in short or long term, the portfolio of cross-species arbitrage was produced through Co-integration Relationship. Other factors such as liquidity, transaction costs, and other market restrictions may produce an empirical lead-lag relationship between price changes in the two markets. Moreover, all the markets do not trade simultaneously for many assets and commodities. We select the main contract from November 15th, 2005 to March 28th, 2012, which contain 1547 data respectively. All the data can be divided into two groups, one is from November 15th, 2005 to December 31th, 2010, which contain 1247 data res pectively; the other is from January 4th, 2011 to March 28th. Our test results suggest a strong bi-directional causality in futures prices. We also find that the soybean contract bears the burden of convergence between soybean and soymeal prices. 

Keywords

Price discovery; Granger Causality; Volatility; Spillover; Commodity markets; soya bean; soya meals.

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