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Identification by full adjustment: evidence from the relationship between futures and spot prices

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  • W. Erno Kuiper
  • Joost M. E. Pennings

Abstract

This paper proposes a test for orthogonality of the errors in a vector error-correction model (VECM) that focuses on the recursive ordering among the contemporaneously correlated errors. The test is based on the fact that when the frequency of the data is sufficiently low one of the variables in the long-run equilibrium relationship adjusts fully within the same period to its new equilibrium level. An empirical investigation of the relationship between spot and futures prices for commodities traded on the Amsterdam Exchanges and the Chicago Board of Trade reveals that the spot price adjusts fully to its new equilibrium level if the price-discovery function of the futures market works well. Copyright 2002, Oxford University Press.

Suggested Citation

  • W. Erno Kuiper & Joost M. E. Pennings, 2002. "Identification by full adjustment: evidence from the relationship between futures and spot prices," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 29(1), pages 67-84, March.
  • Handle: RePEc:oup:erevae:v:29:y:2002:i:1:p:67-84
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    References listed on IDEAS

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    Cited by:

    1. Kuwornu, John K.M. & Kuiper, W. Erno & Pennings, Joost M.E. & Meulenberg, Matthew T.G., 2006. "Risk Management Using Futures Contracts: The Impact of Spot Market Contracts and Production Horizons on the Optimal Hedge Ratio," 99th Seminar, February 8-10, 2006, Bonn, Germany 7755, European Association of Agricultural Economists.
    2. Kuwornu, John K.M. & Kuiper, W. Erno & Pennings, Joost M.E. & Meulenberg, Matthew T.G., 2006. "Strategic Interactions, Risks and Coordination Costs in Food Marketing Channels: The Mediating Role of Futures Markets," 99th Seminar, February 8-10, 2006, Bonn, Germany 7740, European Association of Agricultural Economists.
    3. Baldi, Lucia & Peri, Massimo & Vandone, Daniela, 2011. "Spot and Futures Prices of Agricultural Commodities: Fundamentals and Speculation," 2011 International European Forum, February 14-18, 2011, Innsbruck-Igls, Austria 122002, International European Forum on Innovation and System Dynamics in Food Networks.
    4. Baldi, Lucia & Peri, Massimo & Vandone, Daniela, 2011. "Price Discovery in Agricultural Commodities: The Shifting Relationship Between Spot and Future Prices," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114237, European Association of Agricultural Economists.
    5. María Bielza & Alberto Garrido & José M. Sumpsi, 2007. "Feasibility of a cash forward contract: An application to the French and Spanish potato sectors," Agribusiness, John Wiley & Sons, Ltd., vol. 23(2), pages 245-261.

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