Cotton Temporary Storage Policy and Spot-Futures Interaction

This paper investigates the impact of the government temporary storage policy on the price interactions between the cotton spot and futures markets. We divide the sample into three periods according to the implementation and the abolishment of the temporary storage policy. The empirical evidence indicates that the policy weakens the pricing function of the futures market. The tests based on VAR model show that (1) The temporary storage policy reduces the price reactions in the spot (futures) market to the information shock from its own; (2) The policy decreases the effect of the futures market on the spot market and changes the direction of the influence of the spot market on the futures market; (3) There is a long-term equilibrium between the prices in the futures market and spot market. (4) When investors are more heterogeneous in their beliefs, the impacts of the futures market on the spot market are enhanced.