Investigation of causality between spot and derivatives markets: the case of commodities and financial Indices

Abstract

The study examines linear and non-linear Granger causality between spot and futures markets. For this purpose, daily observations from January 2010 to November 2019 for four commodities, namely WTI oil, natural gas, gold and silver and for four financial indices, namely the DAX30, CAC40, SP500 and Nasdaq100 are used. For each asset, futures contracts of various maturities are considered and are matched in pairs (bivariate) and jointly (multivariate) with the respective spot value. Linear and non-linear causal dynamics are investigated with the conventional VAR/VEC modelling and the Diks and Panchenko (2006) non-parametric test respectively. Regarding commodities, linear examination reveals that futures lead spot market in almost all pairs for the cases of gas, gold and silver, but there is either spot dominance or bidirectional lead in the pairs of WTI oil. The non-linear approach further enhances the leading role of futures for all commodities but also uncovers non-linear feedback mechanisms for a few pairs. Regarding financial indices, linear causal dynamics are weak for the DAX30, but there is evidence that spot linearly leads futures for the CAC40 and that futures linearly Granger-cause the spot for the two US indices. Under the non-linear approach significant bidirectional causal channels emerged for all pairs and all financial indices.