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Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures

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Abstract

This study provides evidence of the importance of a well-defined and functioning spot market for the success of the associated futures market. The United States (US) spot market for nonfat dry milk has several distinct pricing indices, whereas the New Zealand (NZ) market has a single spot reference price. Our analysis of hedging effectiveness and hedge ratio persistence shows that none of the US spot market indices may be hedged effectively with the Chicago Mercantile Exchange nonfat dry milk futures at short hedging horizons, whereas the NZ Stock Exchange whole milk powder futures contract is an effective hedge for the Global Dairy Trade spot pricing benchmark. Four important dimensions of spot market design are identified – timeliness, market-based measurement, forward-spot separation, and inclusiveness.

Suggested Citation

  • Jędrzej Białkowski & Jan Koeman, 2017. "Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures," Working Papers in Economics 17/18, University of Canterbury, Department of Economics and Finance.
  • Handle: RePEc:cbt:econwp:17/18
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    More about this item

    Keywords

    Agricultural Commodities; Hedging; Futures Market Effectiveness; Spot Market Design; Dairy; CME NFDM Futures; NZX WMP Futures; Settlement to Average Spot Price;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade

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