Who has the final say?

Abstract

PurposeThere is a distinct separation of price discovery from pricing power in China's sugar spot and futures markets. The purpose of this paper is to identify the reasons and provide plausible explanations for this stylized phenomenon. Therefore, the research may deepen the understandings of the operational mechanisms and internal efficiency of China's sugar spot and futures markets.Design/methodology/approachThe authors analyze the historical spot and futures price time series from China's sugar spot market and China's Zhengzhou Commodity Exchange (CZCE) within a co‐integration framework.FindingsIt is found that China's sugar spot market has the pricing power, even though the futures market leads the spot market in price discovery. The phenomenon of observed separation of price discovery in spot market from pricing power in futures market may be caused by: irrational speculation in CZCE sugar futures market; oligopoly and local government politics; or the operational efficiency of the wholesale spot market, especially for its comparative advantages of information accessibility in the sugar producing areas. The results are compared with other empirical findings in many other commodities markets to obtain deeper understandings.Originality/valueThe paper uncovers and provides the earliest econometric evidence of the observed stylized phenomenon and also provides plausible explanations for this phenomenon.

Volatility Integration in Spot, Futures and Options Markets: A Regulatory Perspective

“…Most of the studies are on prices, returns, and price discovery in one market caused by the other markets. He and Xie (2012) show that in China, the futures price leads the spot market for price discovery. In the crude oil market, futures contribute to price discovery in the spot market (Silverio and Szklo 2012).…”

Is China's new live hog futures market efficient? Evidence from an analysis of market quality, price discovery and hedging effectiveness

“…In recent years, the price discovery process in Chinese agricultural commodity markets has drawn the interest of scholars. For example, He and Xie (2012) find that the Chinese sugar spot market has more pricing power than the futures market, while Yan and Reed (2014) and Demir et al (2019) provide evidence on corn and cotton futures markets' dominant roles in the price discovery process. Yan and Zhao (2019) demonstrate that the cornstarch futures market in China is efficient for price discovery, although it is a newly emerged market.…”