Efficiency of Base Metal Futures Markets: Evidence Using Non-linear Models

This study examines the efficiency of base metal futures traded on the London Metal Exchange, the New York Mercantile Exchange, the Multi Commodity Exchange of India, and the Shanghai Futures Exchange using daily aluminium and copper prices from 1 January 2015 to 30 September 2025. The analysis draws on both parametric measures, namely information share and component share, and non-parametric approaches, including Shannon and Rényi Transfer Entropy. To further account for time variation and structural changes, the analysis is extended using a Markov-switching vector autoregressive (MS-VAR) model and a time-varying parameter VAR framework, enabling the identification of regime-dependent, continuously evolving dynamics in information transmission. The study supports the transaction cost theory by showing that futures markets play a dominant role in price discovery and are likely to serve as the primary venue for this process, given their lower transaction costs and higher liquidity relative to spot markets. The results from Rényi entropy show that the relationship between futures and spot prices changes as greater weight is given to tail events. At the same time, the MS-VAR model further supports the adaptive market hypothesis by indicating that market efficiency varies across market conditions.