Causality and Price Discovery: An Application of Directed Acyclic Graphs
Directed Acyclic Graphs (DAG's) and Error Correction Models (ECM's) are employed to analyze questions of price discovery between spatially separated commodity markets and the transportation market linking them together. Results from our analysis suggest these markets are highly interconnected but it is the inland commodity market that is strongly influenced by both the transportation and commodity export markets. However, the commodity markets affect the volatility of the transportation market over longer horizons. Our results suggest that transportation rates are critical in the price discovery process lending support for the recent development of exchange traded barge rate futures contracts.
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