Volume 14 | Issue 4 | Article 3
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Price Discovery and Risk Transfer in Thinly Traded Markets: Evidence from Brazilian Agricultural Futures Markets
The paper investigates price discovery and risk transfer of Brazilian agricultural futures contracts. Cash and futures markets are strongly cointegrated but demonstrate different price transmission and ability to transfer risk. In contrast to previous research, findings indicate that price discovery is performed even in thin markets but suggest that co-movement in prices does not imply arbitrage and favorable hedging. Different trading thresholds are required to perform these functions. Risk transfer requires more trading to establish basis patterns than price discovery. It appears that futures markets facilitate the transmission of information even when trading is insufficient to warrant systematic hedging.
