Assessing Efficiency of Base Metals Futures: A Transfer Entropy Approach

Abstract

Base metals like aluminium, lead, and copper are vital in global industrial manufacturing and economic activities, driven by rising demand. Industrial metal prices fluctuate due to supply disruptions, geopolitical tensions, production costs, demand efficiency, etc. (Todorova et al.,2014). The advent of base metals futures has provided market participants with an advanced means for mitigating price volatility, providing them with the ability to actively manage their risk exposure. (Rout et al., 2021). The benefits of using base metals futures are evident, particularly in facilitating price discovery and creating a more robust economic environment. Nevertheless, a discernible diminution in the aggregate trading volume of base metals futures over the preceding six years, as shown in Figure 1, has emerged as a salient concern. The decline in volume raises questions regarding the efficiency of the base metals futures market.