Direct empirical estimation of efficiency in secondary materials markets: The case of steel scrap

The U.S. steel scrap market is used as a test case for a method of directly estimating the efficiency of recycled materials markets. Such markets are examples of commodity markets for which there is no organized futures exchange. If, as widely held, futures markets enhance market efficiency we attempt to answer the question of how recycled commodity markets suffer, if at all, from the lack of a futures exchange. In this paper econometric modeling and time-series methods produce robust estimates of market efficiency as measured by the percent of traders that possess the latest information concerning market disequilibrium. Based on the empirical results it would appear that on a monthly basis the steel scrap industry distributes its commodities in an economically efficient manner and therefore would derive little benefit from an organized futures exchange.