Examining the dynamic relationship between spot and future prices of agricultural commodities
This study examines the dynamic relationship between spot and futures prices of agricultural commodities. We first briefly discuss what the non-arbitrage and asset pricing theory has to say about the relationship between spot and futures markets. Next, using recent price data for corn, wheat, and soybeans, we perform Granger causality tests to empirically uncover the direction of information flows between spot and futures prices. Linear as well as nonlinear (nonparametric) causality tests are conducted on both spot and futures returns and their volatility. The results indicate that spot prices are generally discovered in futures markets. In particular, we find that changes in futures prices lead changes in spot prices more often than the reverse. These findings also contribute to the debate on alternative instruments to address excessive volatility in grain markets. Our results support, for example, the viability of implementing a global virtual reserve, recently proposed by von Braun and Torero (2008, 2009), to prevent disproportionate spikes in grain spot prices through signals and, if necessary, market assessment in the exchange of futures.
|Date of creation:||2010|
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- Robles, Miguel & Torero, Maximo & von Braun, Joachim, 2009. "When speculation matters:," Issue briefs 57, International Food Policy Research Institute (IFPRI).
- Kawai, Masahiro, 1983. "Price Volatility of Storable Commodities under Rational Expectations in Spot and Futures Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 435-459, June.
- von Braun, Joachim & Torero, Maximo, 2009. "Implementing physical and virtual food reserves to protect the poor and prevent market failure:," Policy briefs 10, International Food Policy Research Institute (IFPRI).
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- von Braun, Joachim & Torero, Maximo, 2008. "Physical and virtual global food reserves to protect the poor and prevent market failure:," Policy briefs 4, International Food Policy Research Institute (IFPRI).
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- Cooke, Bryce & Robles, Miguel, 2009. "Recent food prices movements: A time series analysis," IFPRI discussion papers 942, International Food Policy Research Institute (IFPRI).
- Diks, Cees & Panchenko, Valentyn, 2006.
"A new statistic and practical guidelines for nonparametric Granger causality testing,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 30(9-10), pages 1647-1669.
- Diks, C.G.H. & Panchenko, V., 2004. "A new statistic and practical guidelines for nonparametric Granger causality testing," CeNDEF Working Papers 04-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Danthine, Jean-Pierre, 1978. "Information, futures prices, and stabilizing speculation," Journal of Economic Theory, Elsevier, vol. 17(1), pages 79-98, February.
- Brorsen, B. Wade & Bailey, DeeVon & Richardson, James W., 1984. "Investigation Of Price Discovery And Efficiency For Cash And Futures Cotton Prices," Western Journal of Agricultural Economics, Western Agricultural Economics Association, vol. 9(01), July.
- Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30. Full references (including those not matched with items on IDEAS)
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