A Study On The Relationship Between Agricultural Products Futures Market Fluidity And Hedging Performance

The price of agricultural products is influenced by climate and other things, often presents "the spider web effect". therefore the futures market is used to avoid the price fluctuations by farmers, merchants,traders and so on. This kind of function of futures market is called the hedge function. This article mainly researches the relation between futures market hedging performance and the market fluidity, according to the related literature, futures market fluidity and hedging performance is positive correlation. According to the literature, this article selects relevant indexes that represent the futures market fluidity (trading volume, open interest and delivery volume) and hedging performance (basis variance ratio spot price variance), and uses panel data of seven agricultural products (soybean, sugar, soybean oil, soybean meal, rapeseed oil, cotton and palm oil) from July,2008to the December,2010to take the empirical analysis, For obtaining a more meaningful result, this article separately considers the quarterly (short-term) and the semi-annual (medium and long-term) hedging situation, to find the diference between the long and short term hedging performance t and relation of the fluidity and the hedging performance. There are four results:First, futures market’s fluidity is good for hedging performance. Second, in short-term (within quarter) hedging performance is bad, long-term (above semi-annual) hedging performance is good. Third, the delivery volume is bigger, the market fluidity is worse, the delivery volume is worse. Fourth, the trading volume and the open interest need to be divided by the short-term and long-term to sum up. In the short-term the trading volume has little influence on the hedging performance,sometimes because of the large trading volume,the futures price gets a large volatility and makes basis risk large, is bad for hedging performance.but the open interest makes the futures price stable in short-term, is good for hedging performance. However, in long term the trading volume is very important, the larger the trading volume, the better the hedging performance.The open interst represent the inactive contracts, so the larger the open interest, the worse hedging performance.Therefore this article suggests several related proposal that including the contract design (Trading unit, tick size, delivery month, deliverable specifications and so on), the margin rate, the transaction commission, delivery methods and so on.