Abstract
This paper presents a method to measure the functional efficiency of futures markets in terms of social welfare using a standard futures market structural model. Employing the concept of social surplus, it can be shown that the error committed when using futures prices to estimate spot prices in the future results in a welfare loss caused by the erroneous allocation of resources. Therefore, the social welfare associated with the presence of futures markets can be measured using a social loss (SL) statistic and its components. The results confirm the consistency and robustness of the method. Finally, several practical uses for the SL statistic are suggested.
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Notes
- 1.
The crude oil price is that of West Texas Intermediate traded on the New York mercantile exchange.
- 2.
Inefficient in the sense of the EMH.
- 3.
r is the correlation between the price of the commodity relevant for the commercial firm and the price of the standardized commodity defined in the futures contract.
- 4.
Futures prices collect the intertemporal allocation of resources for production and not for consumption, but welfare in the model does not vary significantly.
- 5.
Note that these two variables are different from those that determine the quality of the hedging instrument in the basic model.
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Consuegra, M., García-Verdugo, J. (2015). A Proposal to Measure the Functional Efficiency of Futures Markets. In: Bourguignon, JP., Jeltsch, R., Pinto, A., Viana, M. (eds) Dynamics, Games and Science. CIM Series in Mathematical Sciences, vol 1. Springer, Cham. https://doi.org/10.1007/978-3-319-16118-1_11
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