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What explains the orange juice puzzle: Sentiment, smart money, or fundamentals?

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  • Chou, Pin-Huang
  • Hsieh, Chia-Hsun
  • Shen, Carl Hsin-Han

Abstract

In the famous “orange juice puzzle,” a large amount of inexplicable price volatility arises in frozen concentrated orange juice (FCOJ) futures contracts. Temperature is considered the most important fundamental factor in this market, but its explanatory power is low and limited, so are those of various consumer and stock market sentiment measures that reflect the noise traders׳ opinions. In contrast, shifts in a survey-based index called the Consensus Bullish Sentiment Index (CBSI), which reflect the overall opinions of professional investors, provide the largest explanatory power among all measures. Further analysis reveals that bullish shifts in the CBSI are followed by higher FCOJ returns but lower conditional volatility, thus supporting the notion that the index reflects the smart money effect.

Suggested Citation

  • Chou, Pin-Huang & Hsieh, Chia-Hsun & Shen, Carl Hsin-Han, 2016. "What explains the orange juice puzzle: Sentiment, smart money, or fundamentals?," Journal of Financial Markets, Elsevier, vol. 29(C), pages 47-65.
    • Handle: RePEc:eee:finmar:v:29:y:2016:i:c:p:47-65
    DOI: 10.1016/j.finmar.2015.11.001
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    Cited by:

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    2. Ding, Wenjie & Mazouz, Khelifa & Wang, Qingwei, 2021. "Volatility timing, sentiment, and the short-term profitability of VIX-based cross-sectional trading strategies," Journal of Empirical Finance, Elsevier, vol. 63(C), pages 42-56.
    3. Paroissien, Emmanuel, 2020. "Forecasting bulk prices of Bordeaux wines using leading indicators," International Journal of Forecasting, Elsevier, vol. 36(2), pages 292-309.

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    More about this item

    Keywords

    Orange juice; Temperature; Investor sentiment; Smart money;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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