The dynamic relationship between agricultural futures and agriculture index in China

Purpose – The purpose of this paper is to investigate the long-term and short-term asymmetric effects of the price transmission relationships between agricultural futures and the agriculture index in China. Design/methodology/approach – The paper adopts a threshold autoregressive (TAR) model and momentum-TAR (M-TAR) model that test the prices of futures and spots in the special trading system. Findings – The paper indicates that during different stages of the economic cycle, agricultural futures and the agriculture index exhibit different correlations. During the initial stages of economic upturns and downturns, the addition of futures of agricultural products helps to diversify risk. In contrast, during the late stages of economic upturns and downturns, such additions do not really help to diversify risk. Soybean meal futures and the agriculture index are more strongly correlated with each other. If investors use soybean meal futures to predict the trends in the agriculture index, they will obtain more accurate conclusions. Practical implications – The soybean futures have leading effects in a single range and a lower correlation with the agriculture index. This paper provides a point of reference for investors devising investment strategies and for the Chinese Government in its execution of macro-control policies. It provides a clear review about the estimation methods. It also provides information about China's soybean, soy meal industry. Originality/value – The paper contains updated information about China's soybean and soybean meal trading. It uses new estimation methods (TAR, M-TAR) to examine the co-integration between soybean, soybean meal and the agricultural index. JEL classification: C32, G10