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Forecast Encompassing And Futures Market Efficiency: The Case Of Milk Futures

  • Manfredo, Mark R.
  • Sanders, Dwight R.
Registered author(s):

    The traditional necessary condition for futures market inefficiency is the existence of alternative forecasting methods that produce mean squared forecast errors smaller than the futures market. Here, a more exacting requirement for futures market efficiency is proposed—forecast encompassing. Using the multiple forecast encompassing procedure of Harvey and Newbold, forecast encompassing is tested with the CME fluid milk futures contract. Time series models and experts at the USDA provide the competing forecasts. The results suggest that the CME fluid milk futures do not encompass the information contained in the USDA forecasts at a two-quarter forecast horizon. While the competing forecasts generate positive revenues, it is unlikely that trading returns would exceed transaction costs in this relatively new futures market.

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    File URL: http://purl.umn.edu/20267
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    Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2004 Annual meeting, August 1-4, Denver, CO with number 20267.

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    Date of creation: 2004
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    Handle: RePEc:ags:aaea04:20267
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    1. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
    2. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
    3. Ashley, Richard, 2003. "Statistically significant forecasting improvements: how much out-of-sample data is likely necessary?," International Journal of Forecasting, Elsevier, vol. 19(2), pages 229-239.
    4. R.W. Hafer & Scott E. Hein, 1989. "Comparing futures and survey forecasts of near-term Treasury bill rates," Review, Federal Reserve Bank of St. Louis, issue May, pages 33-42.
    5. Bessler, David A. & Brandt, Jon A., 1992. "An analysis of forecasts of livestock prices," Journal of Economic Behavior & Organization, Elsevier, vol. 18(2), pages 249-263, July.
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