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Time-Varying Risk Premium or Informational Inefficiency? Further Evidence in Agricultural Futures Markets

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  • Frank, Julieta
  • Garcia, Philip

Abstract

Recent research has provided mixed results regarding the presence of a time-varying risk premium in agricultural futures markets. In this paper we test for the presence of a time-varying risk premium and market efficiency focusing on the properties of the underlying data. Specifically, we examine the same markets and period used by McKenzie and Holt (2002) and extend the analysis through 2004. Our results show that accounting for the structural break in the early seventies plays a key role in the findings. In contrast to McKenzie and Holt, we find no evidence of time-varying risk premium in the four commodities analyzed. The corn market appears to be (weak form) efficient. Hogs, live cattle, and soybean meal futures contracts show evidence of inefficiency, which suggests an inability of these markets to incorporate all available information in the futures prices. Our results identify the importance of careful examination of the data as failure to do so can lead to inappropriate conclusions.

Suggested Citation

  • Frank, Julieta & Garcia, Philip, 2005. "Time-Varying Risk Premium or Informational Inefficiency? Further Evidence in Agricultural Futures Markets," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19051, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  • Handle: RePEc:ags:ncrfiv:19051
    DOI: 10.22004/ag.econ.19051
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    File URL: http://ageconsearch.umn.edu/record/19051/files/cp05fr01.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Armah, Stephen E., 2008. "Establishing the Presence of a Risk Premium in the Cocoa Futures Market: An Econometric Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6778, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. repec:zbw:iamodp:169081 is not listed on IDEAS
    3. Prehn, Sören & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2014. "The impact of long-only index funds on price discovery and market performance in agricultural futures markets," IAMO Discussion Papers 169081, Institute of Agricultural Development in Transition Economies (IAMO).
    4. Williams Ohemeng & Bo Sjo & Michael Danquah, 2016. "Market Efficiency and Price Discovery in Cocoa Markets," Journal of African Business, Taylor & Francis Journals, vol. 17(2), pages 209-224, May.
    5. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Parametric Bootstrap Tests for Futures Price and Implied Volatility Biases with Application to Rating Livestock Margin Insurance for Dairy Cattle," Staff Papers 135077, University of Minnesota, Department of Applied Economics.
    6. Yan, Lei & Garcia, Philip, 2017. "Portfolio investment: Are commodities useful?," Journal of Commodity Markets, Elsevier, vol. 8(C), pages 43-55.
    7. Smales, Lee A., 2016. "Trading behavior in S&P 500 index futures," Review of Financial Economics, Elsevier, vol. 28(C), pages 46-55.
    8. Terrance Grieb & Nam Hoang, 2019. "The Effects of Hedging and Speculation on Cash-Futures Basis: Results from U.S. Wheat Markets," Review of Economics & Finance, Better Advances Press, Canada, vol. 17, pages 1-15, August.
    9. Prehn, Sören & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2013. "Der Einfluss von Long-only-Indexfonds auf die Preisfindung und das Marktergebnis an landwirtschaftlichen Warenterminmärkten [The impact of long-only index funds on the price development and the mar," IAMO Discussion Papers 142, Leibniz Institute of Agricultural Development in Transition Economies (IAMO).
    10. Boetel, Brenda L. & Liu, Donald J., 2008. "Incorporating Structural Changes in Agricultural and Food Price Analysis: An Application to the U.S. Beef and Pork Sectors," Working Papers 44076, University of Minnesota, The Food Industry Center.
    11. Andres Trujillo-Barrera & Philip Garcia & Mindy L Mallory, 2018. "Short-term price density forecasts in the lean hog futures market," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 45(1), pages 121-142.
    12. Hoang, Nam & Grieb, Terrance, 2018. "Hedging Positions, Basis, and Futures Risk Premium: A Disaggregated Data Analysis on US Wheat Markets," 2018 Annual Meeting, August 5-7, Washington, D.C. 273799, Agricultural and Applied Economics Association.
    13. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2014. "Parametric Bootstrap Tests for Futures Price and Implied Volatility Biases With Application to Rating Dairy Margin Insurance," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170416, Agricultural and Applied Economics Association.
    14. Pandey, Ajay, 2008. "Hedging Effectiveness of Constant and Time Varying Hedge Ratio in Indian Stock and Commodity Futures Markets," IIMA Working Papers WP2008-06-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
    15. Prehn, S. & Glauben, T. & Loy, J.-P. & Pies, I. & Will, M.G., 2015. "Der Einfluss von long-only-Indexfonds auf die Preisbildung und das Marktergebnis an landwirtschaftlichen Warenterminmärkten," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 50, March.
    16. Feuz, Dillon M., 2009. "A Comparison of the Effectiveness of Using Futures, Options, LRP Insurance, or AGR-Lite Insurance to Manage Risk for Cow-calf Producers," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53046, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    17. Prehn, Soren & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2014. "Der Einfluss Von Long-Only-Indexfonds Auf Die Preisbildung Und Das Marktergebnis An Warenterminmärkten," 54th Annual Conference, Goettingen, Germany, September 17-19, 2014 187363, German Association of Agricultural Economists (GEWISOLA).
    18. Schnake, Kristin N. & Karali, Berna & Dorfman, Jeffrey H., 2012. "The Informational Content of Distant-Delivery Futures Contracts," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 37(2), pages 1-15, August.
    19. Adjemian, Michael K. & Bruno, Valentina G. & Robe, Michel A., 2016. "Forward‐Looking USDA Price Forecasts," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235931, Agricultural and Applied Economics Association.
    20. repec:zbw:iamodp:161078 is not listed on IDEAS
    21. Li, Ziran, 2017. "Three essays on commodity markets," ISU General Staff Papers 201701010800006361, Iowa State University, Department of Economics.
    22. Adjemian, Michael K. & Garcia, Philip & Irwin, Scott & Smith, Aaron, 2013. "Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies," Economic Information Bulletin 155381, United States Department of Agriculture, Economic Research Service.
    23. Bozic, Marin & Fortenbery, T., 2015. "Price Discovery, Volatility Spillovers and Adequacy of Speculation when Spot Prices are Stationary: The Case of U.S. Dairy Markets," 2015 Conference, August 9-14, 2015, Milan, Italy 211369, International Association of Agricultural Economists.

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