Comparative Analysis Of Cotton Futures Market Of China And The United States

Cotton is one of the most important raw materials in the textile industry. It plays anextremely important role in the national economy and people’s life. In the early1970s,the cotton output of China always ranked first in the world market. Due to noestablished cotton futures markets at that time in China, the annual cotton outputfluctuations is big, which caused that cotton production was in a state of instability.Meanwhile, this increases market risk and then increases uncertain factors to thedevelopment of the national economy. However, in America, the cotton output is nextonly to China, and because the US has established an early cotton futures markets andhas functioned well in stabilizing, promoting and regulating cotton production, themargin of increase or decrease of cotton output is rather small. Compared in acomprehensive way, the United States cotton production in stability is better than China,especially in the development trend of growth. Also, it demonstrates the effect of thecotton futures markets on regulating and promoting cotton production. In particular,American cotton futures price has become the international cotton market and barometer,which shows the huge role of futures market. Since Zhengzhou Commodity Exchangeofficially launched cotton futures trade in June1,2004, in less than a decade, China’scotton futures market trading volume has far surpassed the United States cotton futuresmarket becoming as the world’s largest cotton futures market. In recent years, no matterfrom the point of trading volume or holdings, Zhengzhou cotton futures has become theworld’s top five varieties of futures trading, and its international influence is increasing.In China, the development of cotton futures market has a great influence on thedevelopment of cotton spot market and the whole national economy, fully embodyingthe three effects: the futures price discovery and risk aversion and the investment tools,which means well regulating the price of the cotton spot market, proving efficientchannels of hedging and risk aversion for cotton enterprises and being a goodinvestment tool for investors, which richly improves the domestic capital market.In the international cotton futures market, there are two important cotton prices:one is the price of cotton futures in the New York futures exchange, a leading marketprice in the world recently. The other one is the CoflookA and CoflookB index sorted byLiverpool cotton Outlook Company. But along with our country cotton production andsales rising steadily in the international market, China’s cotton market price has a certaininternational status in the international cotton price. This is because the production volume of cotton market in China is affecting the international cotton price. Therefore,cotton prices forming in futures market of China and the United State have becomingthe two most important prices in the international cotton market. This article concludesthe differences of risk characteristics between China and American cotton futuresmarket through the research and analysis of the volatility in the prices of cotton futuresin America and China. It has greatly realistic significance. This paper mainly introducesCotton futures market of China and the United States, in which there are comparisonsrelated to five aspects: the cotton futures contracts, delivery system and risk controlsystem, operating condition and so on.Based on the ARCH model, the paper analyzes China and the United States cottonfutures market price’s volatility of daily yield sequence. Results show that the futuresmarkets of China and the United States have a rather obvious ARCH effect. Which candraw the following conclusions: one is, during the sample period, China and Americancotton futures’ daily return rate time series are with non-normal symmetricaldistribution, normal distribution of peak thick tail, the return sequence, fluctuatedcluster; the second is that there is no significant leverage for the cotton futures market inChina. However, the situation is quite obvious for the American cotton market. Bycontrast, China’s cotton futures yield fluctuation is asymmetrically similar to the returnvolatility of American mature futures market, namely,"bad news" has stronger ability tocause fluctuation, which shows that investors in our country tend to be more sensitive tothe drop of the price profit of futures owing to the fact of avoiding the risk, thisdemonstrates investors’investment risk consciousness constantly strengthen; the third isto compare and analyze various GARCH model fitting effects. According to the AICand SC as the principle of minimum, there comes to the result that the EGARCH modelis the best fitting for the futures market, the best yield fluctuation model; Fourth,according to the estimated results of cotton futures market of China and the UnitedStates, various GARCH model coefficient is close to or greater than the sum of1，whichmeans external shocks have a constant impact on futures market volatility, having a verystrong volatility persistence.Differences between the cotton futures market in China and the United States canbe concluded as the following four aspects drawn from above analysis: one is to dealwith market volatility flexibility; the second is a degree of marketization; the third is theinternational influence; the fourth is regulation and risk management system. Therefore,only given full play to the effect of each link of cotton futures market in China can it effectively improve the efficiency of the market and strengthen confidence in investingcotton futures of individuals and agents. Now based on the actual situation of cottonfutures market in China, the following policy recommendations are put forward: cottonfutures system should pay attention to the liquidity of the market; the cotton futureswarehouse receipts circulate ability should be promoted. Under the premise of effectiverisk prevention, the security and other related systems should be improved; Multi-leveltransaction system of cotton futures and options should be established--futures, optionsand futures spread trading system.