Parametric Bootstrap Tests for Futures Price and Implied Volatility Biases with Application to Rating Livestock Margin Insurance for Dairy Cattle
A common approach in the literature, whether the investigation is about futures price risk premiums or biases in option-based implied volatility coefficients, is to use samples in which consecutive observations can be regarded as uncorrelated. That will be the case for non- overlapping forecast horizons constructed by either focusing on short time-to-maturity contracts or excluding some data. In this article we propose a parametric bootstrap procedure for uncovering futures and options biases in data characterized by overlapping horizons and correlated prediction errors. We apply our method to test hypotheses that futures prices are efficient and unbiased predictors of terminal prices, and that squared implied volatility, multiplied by time left to option expiry, is an unbiased predictor of terminal log-price variance. We apply the test to corn, soybean meal and Class III milk futures and options data for the period 2000-2011. We find evidence for downward bias in soybean meal futures, as well as downward volatility bias in Class III milk options. Importance of these results is illustrated on the example of premium determination for Livestock Gross Margin Insurance for Dairy Cattle (LGM-Dairy).
|Date of creation:||Oct 2012|
|Date of revision:|
|Contact details of provider:|| Postal: 231ClaOff Building, 1994 Buford Avenue, St. Paul, MN 55108-6040|
Phone: (612) 625-1222
Fax: (612) 625-6245
Web page: http://www.apec.umn.edu
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew McKenzie & Michael Thomsen & Josh Phelan, 2007. "How do you straddle hogs and pigs? Ask the Greeks!," Applied Financial Economics, Taylor & Francis Journals, vol. 17(7), pages 511-520.
- 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.
- J. Frank & P. Garcia, 2009. "Time-varying risk premium: further evidence in agricultural futures markets," Applied Economics, Taylor & Francis Journals, vol. 41(6), pages 715-725.
- Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Mean-reversion in Income over Feed Cost Margins:Evidence and Implications for Managing Margin Risk by U.S. Dairy Producers," Staff Papers 132379, University of Minnesota, Department of Applied Economics.
- Brittain, Lee & Garcia, Philip & Irwin, Scott H., 2009.
"Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting,"
2009 Conference, April 20-21, 2009, St. Louis, Missouri
53038, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
- Brittain, Lee & Garcia, Philip & Irwin, Scott H., 2011. "Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(1), April.
- Urcola, Hernan A. & Irwin, Scott H., 2011. "Are Agricultural Options Overpriced?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 36(1), April.
- Thorsten M. Egelkraut & Philip Garcia & Bruce J. Sherrick, 2007. "The Term Structure of Implied Forward Volatility: Recovery and Informational Content in the Corn Options Market," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(1), pages 1-11.
When requesting a correction, please mention this item's handle: RePEc:ags:umaesp:135077. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search)
If references are entirely missing, you can add them using this form.