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Has the Performance of the Hog Options Market Changed?

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  • Urcola, Hernan A.
  • Irwin, Scott H.

Abstract

The hog option contract has served as a risk management tool for the pork industry for more than 20 years. However, very limited information exists about how this market behaves and how it was affected by the contract redesign of 1996. This paper evaluates the efficiency of hog options markets comparing its pricing function during the live hog contract period to the lean hog contract period. Trading returns are computed and adjusted for risk using the Sharpe ratio and the Capital Asset Pricing Model. When the whole sample period is analyzed, results indicate that no profits can be made by taking either side of the hog options markets. However, analyzing the live and the lean hog contracts separately, some evidence suggest that opportunities for speculative profits existed during the live hog contract period. These conclusions are not driven by the extreme price movements in the futures price occurred during late 1998. Further research should investigate whether general futures price movements are responsible for these large returns.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2006 Annual meeting, July 23-26, Long Beach, CA with number 21479.

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Date of creation: 2006
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Handle: RePEc:ags:aaea06:21479

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Keywords: Marketing;

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  1. Joshua D. Coval, 2001. "Expected Option Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 983-1009, 06.
  2. Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
  3. Park, Cheol-Ho & Irwin, Scott H., 2005. "The Profitability of Technical Trading Rules in US Futures Markets: A Data Snooping Free Test," AgMAS Project Research Reports 14771, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
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  7. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  8. William Goetzmann & Jonathan Ingersoll & Matthew I. Spiegel & Ivo Welch, 2002. "Sharpening Sharpe Ratios," NBER Working Papers 9116, National Bureau of Economic Research, Inc.
  9. Lence, Sergio H., 1996. "Relaxing The Assumptions Of Minimum-Variance Hedging," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 21(01), July.
  10. Marcus, Alan J, 1984. "Efficient Asset Portfolios and the Theory of Normal Backwardation: A Comment," Journal of Political Economy, University of Chicago Press, vol. 92(1), pages 162-64, February.
  11. Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, 04.
  12. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
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