Arbitrage in commodity markets: A full systems cointegration analysis

The study investigates long-run relationships between futures and spot prices of cocoa on the New York CSCE and London Fox, respectively, and between both markets. By means of the Johansen Maximum Likelihood approach and the inclusion of interest rates as conditioning variables, the three hypothesized cointegrating vectors are obtained. It turns out that the usage of interest rates is crucial for detecting long-run stationary relationships between spot and futures prices on individual markets. This might explain the failure of previous studies to discover cointegration between spot and futures prices on commodity markets. The existence of asymmetries in the response to deviations from equilibrium relationships is also observed: Futures prices Granger-cause spot prices, but not vice versa. This result is interpreted as evidence for spot prices to react slowly to new information.