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Price discovery and pairs trading potentials: the case of metals markets

Author

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  • Saji Thazhugal Govindan Nair

Abstract

Purpose - This study aims to validate the “expectancy theory” of asset pricing and explores the price discovery process in metals futures markets. Design/methodology/approach - This paper adopts the Johansen cointegration and vector error correction model approach to investigate the potentials of Pairs trading in the metals market during the period 2008–2019. Findings - The results find the price movements in metal markets are not random walk and the current “futures” prices are the reasonable estimate of the “spot” metal prices in future. This study does not notice any significant differences in the price efficiency across metals markets, which signal the effects of limited idiosyncratic forces in price transmission. Practical implications - The research suggests the covert use of metal futures to make gains from arbitrage trading. Originality/value - The study emphasizes the potential of “pair trading” in commodity market context that is seldom discussed in academic papers.

Suggested Citation

  • Saji Thazhugal Govindan Nair, 2021. "Price discovery and pairs trading potentials: the case of metals markets," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 13(5), pages 565-586, March.
    • Handle: RePEc:eme:jfeppp:jfep-06-2020-0139
    DOI: 10.1108/JFEP-06-2020-0139
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    More about this item

    Keywords

    Financial markets; Market efficiency; Asset pricing; Econometric modelling; Metals; Futures; Pairs trading; Cointegration; C51; G11; G13;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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