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Has the Performance of the Hog Options Market Changed?

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

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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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
Date of revision:
Handle: RePEc:ags:aaea06:21479
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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.
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  3. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability Of Technical Trading Rules In Us Futures Markets: A Data Snooping Free Test," 2004 Conference, April 19-20, 2004, St. Louis, Missouri 19011, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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  5. William N. Goetzmann & Jonathan E. Ingersoll Jr. & Matthew I. Spiegel & Ivo Welch, 2002. "Sharpening Sharpe Ratios," Yale School of Management Working Papers ysm273, Yale School of Management.
  6. 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.
  7. 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..
  8. Lence, Sergio H., 1996. "Relaxing the Assumptions of Minimum-Variance Hedging," Staff General Research Papers 5156, Iowa State University, Department of Economics.
  9. Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
  10. 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.
  11. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
  12. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
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