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An Integrated Approach to Modeling Price Volatility in the Live Cattle Futures Market

Author

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  • Evans, Kevin J.
  • Streeter, Deborah H.
  • Hudson, Michael A.

Abstract

An understanding of changes in price volatility is of value to policy makers and exchange committee members as well as other participants in commodity futures markets. Previous research has studied volatility by measuring: 1) the flow of new information into the market, or 2) the effect that the structure of the futures market has on price volatility. In this paper, a model is developed which integrates these two themes in the literature to measure and explain price volatility in live cattle futures prices. The model is subjected to a battery of diagnostic tests so that a comparison can be made between the integrated model and models from previous research. Also, since price volatility from the underlying commodity is a major component in the determination of option premiums, a comparison is made between the integrated model and a naive model to forecast live cattle option premiums.

Suggested Citation

  • Evans, Kevin J. & Streeter, Deborah H. & Hudson, Michael A., 1992. "An Integrated Approach to Modeling Price Volatility in the Live Cattle Futures Market," Staff Papers 121352, Cornell University, Department of Applied Economics and Management.
    • Handle: RePEc:ags:cudasp:121352
    DOI: 10.22004/ag.econ.121352
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    References listed on IDEAS

    as
    1. Ronald W. Ward, 1974. "Market Liquidity in the FCOJ Futures Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 56(1), pages 150-154.
    2. Rutledge, D J S, 1976. "A Note on the Variability of Futures Prices," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 118-120, February.
    3. Deborah H. Streeter & William G. Tomek, 1992. "Variability in soybean futures prices: An integrated framework," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 12(6), pages 705-728, December.
    4. Koontz, Stephen R. & Hudson, Michael A. & Hughes, Matthew W., 1992. "Livestock Futures Markets And Rational Price Formation: Evidence For live Cattle And Live Hogs," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 24(1), pages 233-249, July.
    5. Ted Schroeder & Joanne Blair & James Mintert, 1990. "Abnormal Returns in Livestock Futures Prices Around USDA Inventory Report Releases," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 12(2), pages 293-304.
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    7. Philip Garcia & Raymond M. Leuthold & Mohamed E. Sarhan, 1984. "Basis Risk: Measurement and Analysis of Basis Fluctuations for Selected Livestock Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 66(4), pages 499-504.
    8. Koontz, Stephen R. & Hudson, Michael A. & Hughes, Matthew W., 1992. "Livestock Futures Markets And Rational Price Formation: Evidence For Live Cattle And Live Hogs," Southern Journal of Agricultural Economics, Southern Agricultural Economics Association, vol. 24(1), pages 1-17, July.
    9. Ronald W. Anderson & Jean-Pierre Danthine, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 249-266.
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