Price Discovery In The Soybean Futures Market

Abstract

This paper investigates the price discovery process between the nearby futures prices of soybean, soy meal, and soy oil contracts (Crush constituents) in the U.S. Relationships between these commodities may bear important implications for trading strategies, market inefficiencies, or the derived demand theory. Furthermore, our findings are relevant in light of market microstructure theories, which maintain that the price information disseminates from more liquid contracts. Our VAR and bivariate GARCH model estimates suggest a strong bi-directional causality in Crush futures prices. We also find that while soybean contracts bear the burden of convergence when the spread between soybean and soy meal contract prices widens, this is not true of soybean and soy oil contracts. Furthermore, we show evidence of considerable volatility persistence for the three contracts and volatility spillover between soybean and other Crush constituent futures. The statistical evidence suggests that information arrives in these markets simultaneously. Our findings do not support the derived demand theory.