Price Discovery Function of Gold Futures Market in China
Keywords:
Unit Root, Cointegration, Vector Error Correction, Granger Causality, Impulse Response FunctionsAbstract
The purpose of this paper is to explore whether the Chinese gold futures market has the price discovery function. The Unit Root test, Cointegration test, Vector Error Correction Model (VECM) test, Granger Causality test and Impulse Response Function are used to examine the lead-lag relationship between gold spot price and gold futures price. The paper selects data for the period starting January 9, 2008 to January 9, 2018. The daily spot price is the daily closing price of Au99.95 from the Shanghai Gold Exchange and the daily gold futures price used in this research is the daily settlement price of the gold futures continuous contract. The Unit Root test shows that gold spot and futures prices are stationary at first order difference. Cointegration test reports a long-term equilibrium relationship between gold spot prices and gold futures prices. The short-term dynamic relationship between the gold futures price and the spot price is proved by the VECM test. The results of the Granger Causality test and the Impulse Response Function confirm that the gold spot price leads the gold futures price, but not vice versa. The conclusion demonstrates that China's gold futures market does not have price discovery function.
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