Market quality and the connectedness of steel rebar and other industrial metal futures in China

• DOI: http://doi.org/10.1002/fut.22001
• Date: 01 November 2019
• Published date: 01 November 2019
• Author: Ivan Indriawan,Qingfu Liu,Yiuman Tse

Received: 19 January 2019

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Accepted: 20 January 2019

DOI: 10.1002/fut.22001

RESEARCH ARTICLE

Market quality and the connectedness of steel rebar and

other industrial metal futures in China

Ivan Indriawan

1

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Qingfu Liu

2

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Yiuman Tse

3

1

Auckland University of Technology,

Auckland, New Zealand

2

School of Economics, Fudan University,

Shanghai, China

3

University of Missouri ‐St. Louis,

Missouri

Correspondence

Qingfu Liu, School of Economics, Fudan

University, Shanghai 200433, China.

Email: liuqf@fudan.edu.cn

Funding information

National Natural Science Foundation of

China (NSFC), Grant/Award Number:

71871066

Abstract

We examine the market quality of China’s steel rebar futures, along with three

other important industrial metal futures. Steel rebar futures are the most active

metal futures contracts in China. Our analyses show that while steel rebar and

copper futures are comparable in terms of informational efficiency, they are

more informationally efficient than iron ore and aluminum futures, with low

bid–ask spread, volatility persistence, pricing error variance, and probability of

informed trading. We find a bidirectional connection between iron ore and steel

rebar futures. Furthermore, we show that these metal futures are weakly related

to the Chinese stock market.

KEYWORDS

Chinese metal futures, connectedness, market quality

JEL CLASSIFICATION

G10, G15, G19

1

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INTRODUCTION

Although steel is the world’s second most traded commodity after crude oil, futures contracts for steel had not been

popular until the past decade. This is because large steel producers could previously negotiate long‐term pricing

arrangements with their customers (Morrison, 2011). However, since the 2000s, prices for iron ore, the main raw

materials for steel production, have been much more volatile as economic growth has greatly fluctuated.

The Shanghai Futures Exchange (SHFE) introduced steel rebar futures in April 2009. Since then, Shanghai steel

rebar futures contracts (ticker symbol SRB) have been actively traded by domestic and international market

participants, although strict regulations still dampen growth. The increasing exposure of international manufacturing

companies to Chinese steel prices has increased their interest. Sanderson (2015) reports that the daily trading volume of

metal futures contracts on the SHFE exceeded that on the New York Mercantile Exchange and the London Metal

Exchange combined. According to an annual survey by the Futures Industry Association conducted in 2017, the steel

rebar futures contract traded on the SHFE is the most actively traded metal futures contract in the world. As with other

commodity futures traded in China, most of the activities come from speculative trading by retail investors, which leads

to greater market uncertainty compared to trading by institutional investors.

In this paper, we examine the market quality of steel rebar (or, for simplicity, steel) futures along with other important

industrial metal futures, iron ore, aluminum, and copper, during the period November 2013–March 2018. Using intraday

transaction data, we compare the bid–ask spreads, pricing error, volatility sensitivity and persistence, and the probability of

informed trading (PIN) of the above four metal futures. The bid–ask spread offers a simple measure of transaction costs.

Hasbrouck’s (1993) pricing error measures the informational efficiency of prices, that is, the deviation of the observed price

to the efficient price. A lower variance in pricing error implies greater pricing efficiency and higher market quality. The

J Futures Markets. 2019;39:1383–1393. wileyonlinelibrary.com/journal/fut © 2019 Wiley Periodicals, Inc.

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