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On the Pitfalls of Multi-Year Rollover Hedges: The Case of Hedge-To-Arrive Contracts

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Author Info

  • Lence, Sergio H.
  • Hayenga, Marvin L.

Abstract

It is shown that it is theoretically infeasible for multi-year rollover hedge-to-arrive contracts, and for rollover hedges in general, to succeed at locking in high current prices for crops to be harvested one or more years into the future. The study utilizes 107 years of data to present strong empirical evidence that the corn market behaves remarkably similarly to what price theory predicts. Results also confirm that short historical time series are unreliable for predicting rare events. Hence, empirical studies of risk-management contracts capitalizing on unusual occurrences should use samples sufficiently large to contain a meaningful number of relevant observations.

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Bibliographic Info

Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1965.

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Date of creation: 01 Feb 2001
Date of revision:
Publication status: Published in American Journal of Agricultural Economics, February 2001, vol. 83 no. 1, pp. 107-119
Handle: RePEc:isu:genres:1965

Contact details of provider:
Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
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Web page: http://www.econ.iastate.edu
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Cited by:
  1. Irwin, Scott H. & Martines-Filho, Joao & Good, Darrel L., 2003. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2001," AgMAS Project Research Reports 37510, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  2. Yoon, Byung-Sam & Brorsen, B. Wade, 2005. "Can Multiyear Rollover Hedging Increase Mean Returns?," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 37(01), April.
  3. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income Enhancing and Risk Management Properties of Marketing Practices," Working Papers 127653, Cornell University, Department of Applied Economics and Management.
  4. World Bank, 2005. "Managing Food Price Risks and Instability in an Environment of Market Liberalization," World Bank Other Operational Studies 8264, The World Bank.
  5. Hikaru Hanawa Peterson & William G. Tomek, 2005. "How much of commodity price behavior can a rational expectations storage model explain?," Agricultural Economics, International Association of Agricultural Economists, vol. 33(3), pages 289-303, November.
  6. Irwin, Scott H. & Good, Darrel L. & Martines-Filho, Joao & Batts, Ryan M., 2006. "The Pricing Performance of Market Advisory Services in Corn and Soybeans Over 1995-2004," AgMAS Project Research Reports 37513, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  7. Good, Darrel L. & Martines-Filho, Joao & Irwin, Scott H., 2002. "The Pricing Performance Of Market Advisory Services In Corn And Soybeans Over 1995-2000," AgMAS Project Research Reports 14784, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
  8. Peterson, Hikaru Hanawa & Tomek, William G., 2001. "Income-Enhancing And Risk-Reducing Properties Of Marketing Practices," 2001 Annual meeting, August 5-8, Chicago, IL 20613, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  9. Good, Darrel L. & Irwin, Scott H. & Martines-Filho, Joao & Hagedorn, Lewis A., 2005. "The Pricing Performance of Market Advisory Services in Corn and Soybeans over 1995-2003," AgMAS Project Research Reports 14775, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.

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