Causality and Efficiency in the Coffee Futures Market
AbstractTests for causality and rationality in the coffee futures market were carried out using data from the New York Market. Tests of causality indicated that futures prices strongly influence variations in spot price eight weeks or more to maturity. However, beginning seven weeks to maturity there seems to be a strong causal relationship going from futures to spot and from spot to futures. Risk constancy or neutrality, equality of risk premium and spot price, and efficiency were rejected for the period 18, 51, and 33 weeks or more to maturity. However, simultaneity of risk neutrality and efficiency was accepted for contracts with 55-77 weeks to maturity. The general conclusion from this study is that coffee futures market can be used as an indicator of spot market prices for contracts with 55-77 weeks to maturity. While benefits can be obtained through short term adjustment of available stock and making use of quality storage facilities, planning longer term planting and marketing decisions (e.g., ≥ 77 weeks) on the basis of futures market price can result in misallocation of resources and welfare loss.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 646.
Date of creation: 06 Mar 1992
Date of revision: 1992
Publication status: Published in Journal of International Food & Agribusiness Marketing 1.5(1993): pp. 55-71
Causality; Granger-causality; coffee; futures market; spot market; risk premium; efficiency; resource allocation; welfare;
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- Stein, Jerome L, 1980. "The Dynamics of Spot and Forward Prices in an Efficient Foreign Exchange Market with Rational Expectations," American Economic Review, American Economic Association, vol. 70(4), pages 565-83, September.
- Maurice, Noemie & Davis, Junior, 2011. "Unravelling the underlying causes of price volatility in world coffee and cocoa commodity markets," MPRA Paper 43813, University Library of Munich, Germany, revised 2012.
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