Analyzing Price Discovery Function of Gold Coin Futures Contracts in Iran

Abstract

This paper deals with the question of whether gold coin futures contract in Iran performs expected function of price discovery or not. We investigate this question by using three distinct approaches: linear and nonlinear causality tests between gold coin futures and spot market, volatility spillovers between those markets and share of each market in the process of price discovery. The data cover two periods: 1 August 2011 - 24 November 2013 and 25 November 2013 - 16 July 2015, with the former period corresponding to the unprecedented volatility of gold coin market in Iran and the latter period corresponding to stability of this market. In general, the results show that causality runs from spot prices to futures prices, volatility transmits from spot market to futures market and price discovery takes place mainly in spot market. Overall, the results of this paper reveal that futures market does not perform the expected function of price discovery. The results are consistent with the basic characteristics of futures market in Iran: it is in the early stages of its development and its size, in comparison to the spot market, is small.

Keywords

• futures contract
• price discovery
• linear and nonlinear causality
• volatility spillover
• dcc-garch-vecm model