Cointegration relations between spot and futures prices for selected commodities: Implications for hedging and forecasting
Lu, Richard
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https://hdl.handle.net/2142/19448
Description
Title
Cointegration relations between spot and futures prices for selected commodities: Implications for hedging and forecasting
Author(s)
Lu, Richard
Issue Date
1994
Doctoral Committee Chair(s)
Leuthold, Raymond M.
Kuan, Chung-Ming
Department of Study
Agricultural Economics
Discipline
Agricultural Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, Agricultural
Language
eng
Abstract
Cointegration analysis is used to study the spot and futures price relationships for two storable commodities, corn and soybeans, and a nonstorable commodity, live hogs, over a 13-year period, 1980 to 1992. For corn and soybeans, cointegration is found in most pre-harvest contracts (July), and post-harvest contracts (November and December) in low crop years (1983 and 1988). And, specifying a time dimension in the cointegration relation is often important to finding the evidence of cointegration. And, in general, the cointegration relation would not seriously violate of the spot-futures price parity if we take into account that the spot price is often at a premium or discount to futures in commodity markets. As parity holds under no arbitrage condition, there is no strong evidence against the markets being efficiently linked.
Cointegration is not generally found in other post-harvest contracts, and the cointegration relation is not consistent with the spot-futures price parity. The failure to follow the parity condition might not imply that there exists arbitrage profits opportunities. It is believed that the uncertainty about the coming crop size causes parity to not exist.
For live hogs, the evidence of cointegration relations is generally strong. However, the patterns of cointegration look different from those of corn and soybeans. Unlike corn and soybeans, the live hog price movements are not close to the scenario that two series are drifting away together in cointegration theory. There may exist large size distortions in the cointegration tests, meaning that we reject the null hypothesis of no-cointegration too often.
The information of cointegration, as represented by the error correction term, contributes only slightly to hedging effectiveness. And, taking the estimation error into account, including the information does not generally improve the optimal hedging ratio. Finally, the information of cointegration was not found very useful for price forecasting, based on conditional efficiency and market timing criteria. All in all, using the cointegration approach to analyzing price relationships in commodity spot and futures markets does not seem promising.
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