Interest rate differentials, market integration, and the efficiency of commodity futures markets

Tests for the efficiency of commodity arbitrage typically fail to find cointegration relationships between spot and futures prices and between markets. The reported study investigates the issue for spot and futures prices of cocoa on New York and London markets by means of the Johansen maximum likelihood approach adding interest rates as conditioning variables. The results indicate that interest rates may play an important role in establishing the hypothesized relationships. It is further found that futures prices Granger-cause spot prices, but not vice versa. This is interpreted as evidence for spot prices reacting slowly to new information.