Abstract
In this study we examine gold, silver and oil exchange traded funds (ETFs) and their relation to their respective futures instruments and underlying commodities by using intradaily data. We find that the gold, silver and oil ETFs closely track the performance of their underlying assets by using tracking error and pricing deviation metrics. It has been documented in the finance literature that price discovery occurs in the futures market. We test whether in recent times the existence of ETFs has changed the dominating role of the futures market in price discovery. We find that the availability of ETFs has shifted price discovery for gold and silver to the ETF market, while the oil market has price discovery occurring still predominantly in the futures market.
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Notes
Data retrieved from www.ici.org, on December 22, 2009.
There are many studies in the area of price discovery in commodity markets. Starting with Garbade and Silber (1983) who examine price discovery in wheat, corn, oats, orange juice, copper, gold and silver commodities. Garbade and Silber (1983) find that the futures commodities market leads the cash commodities market in price discovery. Garbade and Silber (1983) find that 75% of the information for wheat, corn and orange juice is provided by the futures market. In contrast, Quan (1992) does not find that the price formation occur in the futures market. However, Quan examines only crude oil commodity. Schwarz and Szakmary (1994) re-examine and criticize Quan (1992) study and find that the futures market dominates the cash market by looking again in the crude oil commodities market. Schroeder and Goodwin (1991) examine the live hogs market and find that 65% of the price discovery appears in the futures market. Pavabutr and Chaihetphon (2010) study the gold futures contract in India and find that the available futures contracts lead spot prices in gold price discovery.
The CBOT contract is now traded on the NYSE Liffe. In 2008, NYSE Euronext which owns the NYSE Liffe acquired the CBOT’s precious metals business from the CME Group.
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Acknowledgements
This paper was previously circulated under the title: “Price Discovery in Commodity Markets.” I would like to thank the journal editor, James Payne, two anonymous referees and San Jose State University A&F department seminar participants for their insightful comments and suggestions on this project. Any errors are my own.
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Ivanov, S.I. The influence of ETFs on the price discovery of gold, silver and oil. J Econ Finan 37, 453–462 (2013). https://doi.org/10.1007/s12197-011-9205-8
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DOI: https://doi.org/10.1007/s12197-011-9205-8