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Price discovery in cash and futures interest rate markets in New Zealand

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Abstract:

This paper examines the source of price discovery in cash and futures markets for short-term interest rate contracts in New Zealand. The study employs the Garbade Silber model and the error correction Granger causality framework to identify the source of price discovery. The bill futures market is found to dominate the cash market in terms of price discovery. However when information contained in the shape of the cash market yield curve is taken into account, the cash market is found to play a more prominent role in price discovery. The empirical results also reveal that the cash and futures markets exhibits relatively slow convergence to equilibrium, suggesting that a lack of arbitrage services has a greater impact on the speed of price discovery than on the source of price discovery.

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/096031099332249

Publication date: August 1, 1999

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