An Empirical Research On Dalian Iron Ore Futures Market Effectiveness

With the rapid development of Chinese economy and society, the Chinese steel industry is booming and China becomes the world’s largest iron ore importer and consumer at this moment. Chinese demand for iron ore increases gradually which leads to the world’s iron ore spot trading scale is growing. At the same time the iron ore pricing methods have also changed so that the iron ore pricing by the annual long agreement transforms to financial index trend. The Iron ore futures market plays an important role of price discovery and hedging.Especially the price hedging has became the effective means to avoid price risk for the iron and steel enterprise. To correctly realize the relationship between the iron ore futures market and the iron ore spot market is so important to keep the effectiveness of the hedging strategy.Effectiveness based on the price of iron ore futures market conduction, risk measurement validity and effectiveness of cash deposits, which come to a conclusion as follows:1. Price conduction efficiency:The VAR model、cointegration equation、error correction model、impulse response function and variance decomposition suggest that iron ore futures price is only affected by its price and lag price;Spot price is not only affected by its price and lagging price, but also by the futures price and the futures lag price. In one word, iron ore futures market plays a one-way leading role in the spot market.2. Risk measurement efficiency:To use GARCH (2,2)-M model to estimate the VAR of the daily value can control the futures market price risk effectivly. But there are still many price differential value is greater than the estimated VAR. This suggests that the VAR value underestimates the market risk, so introduction of margin system can avoid market risks effectively.3.Margin effectiveness:Although Chinese iron ore futures margin 6.5% can control the market risk effectively, which causes high nbre ratio and low capital utilization efficiency.To improve the margin level can overcome the defects of low capital utilization rate effectivly, at the same time it has an advantage in controlling market risk.