China 's Sugar Futures Market, The Basic Functions And The Impact Of The Incident Test

Sugar futures listed for trading in Zhengzhou Commodity Exchange on January6th,2006. Before the listing, China’s sugar spot market prices often spike, and the development of the sugar futures market also experienced frustrations. We still can remember the August Contract Event happened in Guilin’s sugar wholesale trading center. Price discovery and hedging are the two basic functions of futures market. It is generally concerns that whether the ZCE’s sugar futures market gives full play to the price discovery and hedging functions. In addition, among the many factors affecting the sugar price, the buying and selling of the national sugar reserve event apparently cannot be ignored, the impact of that event on the ZCE’s sugar futures market is also a hot issue.The empirical analysis is divided into three main parts to answer these questions. Firstly, we use the unit root test, cointegration test, Granger causality test, error correction model, impulse response function and variance decomposition method to test the price discovery function of sugar futures market. Secondly, we use ordinary least squares method, bivariate vector auto-regression model and error correction hedging model to test the hedging function of sugar futures market. Last but not least, we use the event study to test the impact of the buying and selling of the national sugar reserve event on the sugar futures market.The empirical analysis results show that the ZCE’s sugar futures market gives some play to the price discovery and hedging functions. But for the price discovery function, there exists only one-way guiding relation from the futures market to the spot market. The buying of national sugar reserve event led the futures market into producing significant positive abnormal returns in the next day to the fifth day after the event announcement date. It showed that under-reaction phenomenon existed in the sugar futures market. The selling of national sugar reserve event led the futures market into producing significant positive abnormal returns within two days after the event announcement date. It showed that the selling of national sugar reserve event didn’t cause significant decline in the futures market.