Investigation of Price Discovery and Efficiency for Cash and Futures Cotton Prices
Western Journal of Agricultural Economics
The role of the futures market in price discovery and its impact on efficiency have been the subject of much research and controversy. Martin and Garcia concluded in their study that futures markets are not agencies for rational price formation. However, Just and Rausser presented evidence that the futures price is a good estimator of the cash price in a future time period. Grossman and Stiglitz showed the existence of an inefficient cash market is necessary for a successful futures market. Since transaction costs (e.g., storage, interest, commissions, transportation) are lower in the futures market, speculators with access to information are able to use their information to make a profit and at the same time aid in price discovery.
Brorsen, B.Wade, and DeeVon Bailey. Investigation of Price Discovery and Efficiency for Cash and Futures Cotton Prices. Western Journal of Agricultural Economics 9(1984):170-76.