Pricing Behaviour in Australian Financial Futures Markets

This paper identifies two major sets of issues which have been raised in the study of financial futures markets outside Australia. The first concerns the hypothesis of market efficiency, which asserts that futures prices fully reflect available information about subsequent prices in the physical markets. Secondly, there is the question of whether or not futures trading has a detectable influence on the short-term variability of spot prices. A weekly data set, covering each of the three main SFE contracts over the period from December 1984 to February 1988, is used to investigate the two sets of hypotheses. Statistical results generally support the efficiency hypothesis, the one clear exception being the case of the pre-crash sample for the SPI contract; a significant average discount was found in this case, indicating that the futures market may have anticipated the subsequent crash. In investigating potential causal links from futures markets to physical markets, two main findings are obtained. First, no link is detected from futures trading volumes to spot price volatility; and secondly, the data suggest that futures price movements have tended to lead spot price movements during the sample period by between one and two weeks. It is argued that this result is consistent with conventional theory, which suggests that prices will react to new information most quickly in those markets where transactions costs are lowest.