News-driven bubbles in futures markets

Heng-Guo Zhang and Tailong Li

Abstract

This paper proposes a model to study the relationship between news-driven trade war expectations and bubbles. When trade war expectations, policy news, trading volume and cashflow have a positive causal effect on asset prices at the same time, bubbles often occur. When these four factors have a negative causal effect on asset prices at the same time, there are often no bubbles. When the four factors have both positive and negative causal effects on asset prices, investors create their demand for a risk asset and exhibit signs of wavering. Several crude oil futures in China’s futures market have experienced bubbles during the same time period. This outcome shows that China’s crude oil futures market is greatly affected by trade war news information and news-driven trade war expectations.