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Price Discovery, Volatility Spillovers and Adequacy of Speculation when Spot Prices are Stationary: The Case of U.S. Dairy Markets

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  • Bozic, Marin
  • Fortenbery, T.

Abstract

This article contributes to the debate on time series properties of commodity cash and futures markets and the impact of speculation on commodity futures markets. We reconcile production theory, which predicts cash commodity prices will be mean-reverting, with the efficient market hypothesis which is consistent with unit root process for futures prices. It is shown that when the underlying cash price series does not contain a unit root, a nearby futures price series can be nonlinear, having martingale properties within each contract segment, and mean-reverting changes at contract rollover points. We develop a novel ECM-BEKK-MEX model that handles nonlinearities in futures prices in a simple and practical way, and allows full flexibility in modeling the impact of speculation on conditional cash and futures price variances while preserving positive definiteness of the bivariate variance matrix. The model is applied to the U.S. dairy sector.

Suggested Citation

  • 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.
    • Handle: RePEc:ags:iaae15:211369
    DOI: 10.22004/ag.econ.211369
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    References listed on IDEAS

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    1. Ahmed, Osama, 2021. "Do future markets protect the spot markets in developing countries? The case of the Egyptian wheat market," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 20(5), pages 65-83.

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    Livestock Production/Industries; Marketing;

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