Research On Intertemporal Arbitrage Of Cotton Futures Market In China

Arbitrage is to make a profit from taking advantage of the opportunities of pricedistortion in the futures market, which will eventually disappear. According to the thearbitrage equilibrium theory, arbitrage can increase the futures market liquidity, make futuresprices more reasonable, and make the futures market more effective. Based on the theory ofintertemporal arbitrage, the paper studies whether China’s cotton futures market exist theopportunity to arbitrage, and verifies that though different month cotton futures contractshave a long-term stability with each other, the long-term stable relationship deviate in theshort term. This intertemporal create the conditions for arbitrage. Futher more, this papermakes further research on the intertemporal arbitrage model and trends of intertemporalarbitrage. Studies show that there are arbitrage opportunities in China’s cotton futures market,and it is more practical to arbitrage in the market through the model of intertemporalarbitrage.This study gives the arbitrageurs a practical instruction, and also proposes policyrecommendations which can promote the trade of arbitrage, including margin preferentialpositions exemption and optimize trading system, in order to make futures market perform itsfunctions, including price discovery and hedging.