The application of VAR model in the empirical study on steel futures price discovery

Abstract

In order to discuss the price discovery function of steel future, this paper made an empirical study with weekly data of rebar future price and spot price, which was by means of Johansen cointegration test, Granger causality test, Variance decomposition and Impulse response function basing on VAR model. It was found that there was long-run equilibrium relationship and Granger leading relationship between the two price series. Furthermore, it was proved that futures price shares a higher part of total variance than spot price by variance decomposition, and in short term both the future price and spot price made a stronger reaction to the standard difference innovation of future price than that of spot price. Therefore, this article illuminated that rebar futures plays a more important role in price discovery.