Futures markets and spot price volatility: A case study

Futures markets, where they exist, can play a crucial rob in determining th e storage decision in the underlying spot (physical) market. The futures ma rket acts as a conduit for market information and is a gatherer of agents' expectations about the future prospects for the spot market. As such, it is able to provide both price insurance and Price discovery robs, the latter of which generates information for spot market traders and allows them to m ake rational storage decisions. If this were to be the case, then the effic iency of storage is improved which cart potentially lead to a reduction in the volatility of spot Prices over the marketing season. The existing liter ature is ambiguous as to whether futures markets can help spot markets pric e more efficiently This paper seeks to examine whether this is the case in the British maincrop potato market by evaluating the volatility of spot pri ces over the Period 1969-96 in, a "before-after" analysis of the impact of the introduction of futures trading in 1980. The results suggest that the i ntroduction of the futures market has led to a reduction in price volatilit y, despite some problems in the operation of the futures market itself.