the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

econometric developments in agricultural and resource economics the first 100 years this article reviews the major contributions of agricultural and resource economists in the area of econometrics over the past 100 years early on a number of agricultural economists were in on the ground floor in terms of developing new econometric methods over time as the economics profession became more empirically oriented agricultural and resource economists increasingly assumed the role of early adopters of new econometric methods even so agricultural and resource economists continue to make useful modifications to econometric techniques in order to adapt the methods to the unique nature of the problems and applications that we study

the purchasing power of money and nominal interest rates a re examination while it has been known for some time that under uncertainty the original version of the fisher hypothesis is not precisely correct empirical researchers have largely ignored this fact such an omission has possibly resulted in erroneous conclusions concerning other hypotheses most notably the impact of prices on the real economy this paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates empirical tests based on both the livingston survey data and data from time series forecasting models provide support for the fisher effect and the hypothesis that only covariance risk is priced in the treasury bill market one of the basic hypotheses concerning rationality in financial markets is based on statements generally attributed to fisher 18 fisher argued that the nominal or money rate of return on an asset should compensate an investor for his or her required real rate of return and changes in the purchasing power of money for the uncertainty case fisher replaced known purchasing power changes with the expected inflation rate whereas the fisher relationship under certainty is well defined his basic theorem under uncertainty is not precise as fama 15 has argued it is changes in the purchasing power of money not the inflation rate that should concern investors under uncertainty the expected value of one is not by jensen s inequality the inverse of the expected value of the other moreover fama and farber 16 grauer and litzenberger 20 and benninga and protopapadakis 3 have shown that when investors are risk averse the fisher relationship will generally not hold even after adjustment has been made for the distinction between purchasing power changes and the inflation rate in particular these authors show that an adjustment must be made for the fact that the real rate of return on nominal bonds is random while these issues have been discussed in the theoretical literature they have largely been ignored in the empirical work on this topic given the fact that nominal rates do not seem to adjust as rapidly to price changes as fisher hypothesized numerous empirical researchers have expanded the basic fisher model in an attempt to explain this empirical anomaly these extensions include the incorporation of a inflation rate variability and the growth in real output

commodity price forecasting with large scale econometric models and the futures market this paper compares the accuracy of major commercial price forecasts for corn wheat soybeans soybean oil soybean meal cotton live cattle and hogs the price forecasting information in futures prices is evaluated by comparison the results among commercial forecasters are mixed but futures prices perform relatively better on average although not universally so these results have important implications for operational risk management

decentralized trading strategic behaviour and the walrasian outcome for a market with a finite number of agents pairwise matching and bargaining it is shown that even when the market is frictionless the equilibrium is not necessarily competitive it depends on the amount of information agents use if their behaviour is conditioned only on the sets of agents present and the time the competitive solution is the unique subgame perfect equilibrium if agents have full information and condition their behaviour on some of it there are also noncompetitive equilibria in which behaviour depends on specific information such as the identity of the trading partner and past events

grain price expectations of illinois farmers and grain merchandisers the study s purpose is to measure the extent to which futures and option prices reflect the subjective price distribution of a subset of market participants farmers and grain merchandisers in illinois findings suggest that in most instances the futures price is an appropriate proxy for expected price however volatilities implied by option premia usually overestimate the subjective variances of producers and merchandisers these differences between individual and market expectations of variance are consistent with findings of overconfidence in the psychology literature and should be considered by analysts when making observations about hedging decisions and risk aversion

valuation and optimal exercise of the wild card option in the treasury bond futures market the chicago board of trade treasury bond futures contract allows the short position several delivery options as to when and with which bond the contract will be settled the timing option allows the short position to choose any business day in the delivery month to make delivery in addition the contract settlement price is locked in at 2 00 p m when the futures market closes despite the facts that the short position need not declare an intent to settle the contract until 8 00 p m and that trading in treasury bonds can occur all day in dealer markets if bond prices change significantly between 2 00 and 8 00 p m the short has the option of settling the contract at a favorable 2 00 p m price this phenomenon which recurs on every trading day of the delivery month creates a sequence of 6 hour put options for the short position which has been dubbed the wild card option this paper presents a valuation model for the wild card option and computes estimates of the value of that option as well as rules for its optimal exercise the treasury bond futures contract on the chicago board of trade gives several delivery options to the short position the quality option which allows the short to deliver any of several eligible delivery bonds has already been studied fairly extensively because many bonds are eligible to be delivered against the futures contract and the conversion factors used to adjust for the bond actually delivered do not perfectly reflect relative price differences the short side trader will choose to deliver the cheapest eligible bond kilcollin 71 presents a discussion and analysis of conversion factors and their effects on the optimal delivery bond gay and manaster 4 present a theoretical valuation model for the quality option when two classes of commodities with uncertain end of period spot prices may be delivered garbade and silber 3 provide a similar analysis and estimate parameters of the valuation formula for a variety of agricultural commodity futures kane and marcus 6 have used monte carlo simulations to value the quality option in the treasury bond futures market in contrast the various timing options embedded in the delivery process have received comparatively little attention one of the most important of these is the so called wild card option the wild card option arises because the futures market closes each trading day at 2 p m central standard time which locks in the futures settlement price for the rest of the day while the short trader has until 8 p m of each trading day in the delivery month to declare an intent to deliver

the efficiency of the london metal exchange in this paper the three approaches available to test the hypothesis that the futures price is an unbiased predictor of future spot prices are utilized to analyze the efficiency of the london metal exchange for the period january 1975 december 1983 the first technique uses non overlapping observation and derives a test of this hypothesis using ols the second uses overlapping data and models explicitly the moving average process in the error structure using arma procedures the third uses a fiml technique to estimate a bivariate stochastic stationary process of the spot and futures prices and tests the unbiased predictor hypothesis in the form of complex non linear cross equation restrictions the results conform to the predictions of the unbiased predictor hypothesis regardless of the methodology and or data employed

a century of research on agricultural markets this article provides a perspective on major innovations in research on agricultural markets over the past century we review research on market structure and performance vertical coordination arrangements and institutions for producer collective action contributions to empirical modeling of agricultural price determination and marketing margins are also evaluated as are innovations in research on spatial market relationships and the role of storage finally we discuss contributions to understanding market information systems and the functioning of market based mechanisms for agri

market efficiency in agricultural futures markets market efficiency and unbiasedness are tested in four agricultural commodity futures markets live cattle hogs corn and soybean meal using cointegration and error correction models with gqarch in mean processes results indicate each market is unbiased in the long run although cattle hogs and corn futures markets exhibit short run inefficiencies and pricing biases models for cattle and corn outperform futures prices in out of sample forecasting results also suggest short run time varying risk premiums in cattle and hog futures markets

a strategic analysis of sinking fund bonds abstract unlike most securities the pricing of sinking fund bonds is influenced by the distribution of ownership which summarizes the extent to which the market is cornered the effect of the distribution of ownership on the pricing of sinking fund bonds is examined by an explicit game in which the price obtained for bonds sold can depend upon the size of the investor s position this framework is used to contrast the valuation of sinking fund bonds with the valuation of amortizing bonds and straight debt we show that it is generally incorrect to view sinking fund bonds as being equivalent to serial bonds

the semi strong form efficiency of the london metal exchange 1983 the semi strong form efficiency of the london metal exchange applied economics vol 15 no 5 pp 681 698

an empirical analysis of implicit delivery options in the treasury bond futures contract abstract assuming perfect frictionless and efficient markets this paper develops a framework to estimate the composite value of the quality wild card and end of month options implicit in the t bond futures contract the value of delivery options is shown to be the excess of forward price of the cheapest bond over its conversion factor times the exercise price of futures contract empirical results indicate that the option values over the last quarter of the nearby contract are on average less than 0 5 percent of the mean futures price which is substantially lower than the value reported by previous studies further scrutiny reveals that although the empirical estimates are contaminated by non synchronous bond data they are consistent with certain known theoretical properties of option values

modeling macroeconomies as open ended dynamic systems of interacting agents uall models are wrong but some are useful g e p box 1979 macroeconomists seek to understand the structure and performance of economies at a national or regional level and the manner in which government policymakers attempt to influence this structure and performance over time such understanding would seem to require a systematic exploration of the intricate feedback loops connecting micro behaviors interaction patterns and macro regularities as observed in real world economies

supply demand and technology in a multiproduct industry texas field crops the purpose of this paper is to examine the structure of agricultural production for six texas field crops cotton grain sorghum wheat corn rice and hay which account for nearly 95 of recent field crop value specific objectives are to a test the structure of technology to determine i if output and input utilization choices for individual products are independent of production decisions about other outputs and ii if products and or inputs can be consistently aggregated b estimate a coherent set of interrelated supply functions for the six commodities and input demand functions for fertilizer and hired labor because the empirical focus of this paper is specific to one state the results will be of limited value for interpreting specific production relationships elsewhere however the problem is of common interest in production agriculture and the techniques used demonstrate an important application of dual modeling

robustness of the mean variance model with truncated probability distributions the known sufficient conditions for the mean variance framework to produce expected utility results are violated in the presence of truncated probability distributions a theoretical simulation is conducted to examine the ability of the linear mean variance model to approximate expected utility results when the income distribution is truncated by the use of commodity option contracts the mean variance model is shown to produce solutions that are close approximations to the expected utility model results under the assumptions of constant absolute risk aversion and normally distributed prices however some inconsistency was found between the comparative static results of the two models

delivery uncertainty and the efficiency of futures markets this paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets examining soybean futures contracts we show that delivery basis risk has important implications for market efficiency tests as suming no delivery basis risk the market efficiency hypothesis is rejected however fu tures prices contain signiflcant time varying expected delivery basis and time varying ex pected delivery risk premiums once these expected delivery basis and delivery risk premiums are accounted for the apparent inefficiency is eliminated equilibrium spot prices also contain signiflcant time varying expected delivery risk premiums

the value of wildcard options wildcard options are embedded in many derivative contracts they arise when the settlement price of the contract is established before the time at which the wildcard option holder must declare his intention to make or accept delivery and the exercise of the wildcard option closes out the underlying asset position this paper provides a simple method for valuing wildcard options and illustrates the technique by valuing the sequence of wildcard options embedded in the s p 100 index oex option contract the results show that wildcard options can account for an economically significant fraction of oex option value many exchange traded derivative securities contain embedded delivery

futures market efficiency in the soybean complex 13 1 rev division of agricultural sciences university of ifornla working paper no 139 r i j futures market efficiency in the soybean complex gordon c rausser and colin carter giannini foundation of agricultural economics l ibraili v im california agric u l tural elqieriment station giannini foundation of agricultural economics march 1982

day of the week effects in financial futures an analysis of gnma t bond t note and t bill contracts this paper provides a comprehensive study of weekly seasonal effects in gnma t bond t note and t bill futures returns two distinct patterns are found in returns on gnma t bond and t note contracts while no seasonals are noted for t bill futures a negative monday seasonal similar to the well known monday effect in stock returns is found for gnma and t bond contracts a positive tuesday seasonal is found on gnma t bond and t note contracts our evidence indicates that the significance of weekly sea sonals depends in an important way on the time period studied the negative monday phenomenon occurs only in the data before 1982 while the positive tuesday effect is present only after 1984 in addition we find that both seasonal phenomena occur only during months prior to a delivery month this effect appears to be related to the calendar month more specifically the monday effect is apparently concentrated during february while the tuesday effect is concentrated during may

pricing efficiency in the live cattle futures market further interpretation and measurement the pricing efficiency of the live cattle futures market is evaluated using out of sample forecasts from an econometric model an arima model and composite forecasting procedures in terms of the mean squared error criterion a necessary condition for market efficiency at least one of the models and frequently more forecasted more accurately than did the futures market however market simulation results based on the most accurate forecasts generated large risk return ratios these results do not show strong evidence of inefficiency and call into question the use of only mean squared errors to examine a market s pricing efficiency

an ex post valuation of the quality option implicit in the treasury bond futures contract abstract this paper develops three empirical estimates of the value of the quality delivery option implicit in the treasury bond futures contract a an ex ante value as given by the excess of forward price of the cheapest to deliver bond over its conversion factor times the futures price b an ex post value equal to the payoffs to a strategy of buying and holding a short futures long forward position at the start and delivering the cheapest bond at the expiration of futures contract and c another ex post value equal to the sum of payoffs to a continuous rollover strategy involving a short futures long forward position in the cheapest to deliver bonds three months prior to delivery the average values of the three estimates are 464 329 and 2 075 respectively the differences among the three estimates appear to be largely due to nonsynchronous spot futures data

the quality delivery option in treasury bond futures contracts this paper uses three methods to estimate quality option values for cbot treasury bond futures contracts it presents evidence regarding 1 payoffs from exercising this option at delivery 2 estimates from a t bond futures pricing model that incorporates this option and 3 estimates obtained from an exchange option pricing formula the results indicate that this option is worth considerably less than reported by kane and marcus 1986a for example payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0 30 percentage points of par

gender differences in marketing styles recent research has found that men trade stocks more frequently than women and receive a lower price as a result the behavioral finance literature attributes this greater trading activity to men s overconfidence women s lack of overconfidence and past agricultural economics research suggest the possibility that women may be better at marketing grain than men this article uses actual transactions of farmers marketing wheat and also finds that men trade more often than women women also sell two weeks later in the marketing year there is no direct effect of gender on price received but by storing longer women receive 1 4 cents bushel less than men on average in contrast to the arguments in previous research we argue that men s greater number of trades can be better explained by men enjoying trading rather than by overconfidence

a discounted cash flow model of convertibles subject to multiple calls in a world of refunding costs and stochastic interest rates fixed income securities which can be converted into other assets such as common stock represent a sizable portion of the capital market 33 and have therefore received frequent attention in the financial literature 20 21 23 35 39 however due to their complexity attempts to develop mathematical models of convertibles have encountered severe computational and theoretical difficulties 36 one of the primary complications results from convertible securities generally having contractual call features which permit the issuing organization to redeem the securities at stipulated dates for specific prices in addition although a majority of convertibles listed in moody s bond guide have sinking funds the issue of analyzing convertible sinking fund calls represents a specific problem that has never been adequately addressed early studies of convertibles such as brigham 10 focused on the discounted cash flow approach to valuing the securities the general procedure was to estimate a terminal price for the convertible on an arbitrarily specified date in the future and then take the present value of the price together with all intervening fixed income payments these models lacked precision insofar as no theoretical framework was developed for specifying the relevant terminal date terminal price or discount rate and the individual effect of each call feature on convertible values was largely ignored other research such as walter and que 38 has employed regression analysis to pro

interpreting the movements in short term interest rates this article uses modern asset pricing theory to examine the behavior of short term nominal interest rates over the past twenty five years the analysis investigates whether variation in the stochastic behavior of consumption growth and inflation can explain movements in the rate of interest the model estimated allows for taste shocks to utility the authors results reveal that much of the month to month movement in nominal interest rates reflects changes in the real rate and the risk premia in addition to inflationary expectations copyright 1992 by university of chicago press

outlook vs futures three decades of evidence in hog and cattle markets the accuracy of hog and cattle price forecasts from four outlook programs is compared with forecasts derived from futures markets most of the series begin in the mid to late 1970s and end in 2007 root mean squared error rmse comparisons indicate the difference between outlook and futures rmse is relatively small in most cases in directional terms outlook forecasts beat futures prices only 2 out of 11 times in hogs and 1 out of 7 times in cattle however the null hypothesis that futures encompasses outlook is rejected in 5 of 11 cases for hogs and 4 of 7 cases for cattle

forward and futures markets and the competitive firm under price uncertainty recent remedies for managing the output price risk faced by a competitive firm sometimes include the prescription of hedging this practice usually entails combining spot market sales with trading opportunities in forward or futures markets the forward hedge represents a risk free price the futures hedge offers a risky alternative which arises because of basis the variable relationship between the spot and futures quotations rather than treating forward and futures as mutually exclusive or as perfect substitutes a competitive firm can carefully construct a portfolio which combines spot forward and futures positions holthausen 9 and feder just and sclmitz 5 hereafter fjs initiate an extensive discussion of a risk averse firm which uses futures contracts when faced with an uncertain output price but no basis risk both articles employ general utility and density functions to derive their results their conclusions include independence of the production decision from the probability density of the spot price and the firm s degree of risk aversion extensions of these two articles usually focus on the robustness of the separation conclusion to either the addition of basis or the addition of production uncertainty to the models the risk free characteristic that holthausen and fjs attribute to futures contracts really better describes a forward contract jarrow and oldfield 11 paul heifner and helmuth 17 and many others document the importance of recognizing the unique charapteristics of these two different types of contracts batlin 2 builds on the holthausen and fjs foundation by adding basis risk to his model fjs explicitly qualify their model as applicable to only those commodities with little or no production uncertainty subsequent articles augment their analysis with the condition of stochastic production chavas and pope 3 anderson and danthine 1 marcus and modest 15 ho 8 and grant 6 all include production uncertainty in different permutations of the fundamental model those which simultaneously include both basis and production risk achieve analytical solutions by assuming specific utility or density functions

implications of commodity price behavior for marketing strategies prices of agricultural commodities have systematic dynamic components and many agricultural economists have thought that forecasts of this behavior ought to aid marketing decisions thereby raising producers returns but if commodity markets are pricing efficient then noncompetitive profit opportunities should be quickly arbitraged away thus a debate exists about the magnitude of the likely benefits of various marketing strategies herein we address the question what does the literature about commodity price behavior contribute to our understanding of the expected outcomes from alternative marketing strategies our brief answer is as follows spot prices in u s commodity markets typically behave in a way that is consistent with efficient markets systematic behavior persists because of the costs of arbitrage hence price forecasts in the public domain cannot be used to produce returns which are consistently above the competitive norm although low cost strategies to manage price risk exist evaluating the evidence on these topics is not easy however because the price generating processes are complex sometimes prices seem to behave as if a market is inefficient advice based on analyses using short samples should be used with great caution the remainder of the article elaborates

corporate bond price data sources and return risk measurement to date a number of studies involving the use of bond prices and or returns have utilized the published prices of trades on the new york and other exchanges these exchange quotes reflect the odd lot activities of individual investors and account for only a negligible portion of the trading in listed issues in contrast the vast majority of listed corporate trading occurs over the counter and involves round lot trades between institutions given differences in market characteristics odd lot exchange prices may differ substantially from those in the round lot institutional market this study compares exchange quotations from moody s bond record with prices assigned by merrill lynch s institutional pricing service and uses each set of prices to calculate return and risk measures institutional merrill lynch bond prices are shown to be systematically greater than exchange moody s prices in addition bond returns based on merrill lynch prices are shown to yield significantly higher beta and r 2 estimates as well as significantly lower standard deviation and residual risk estimates

decentralized dispersed exchange without an auctioneer abstract we stimulate exchange among geographically dispersed agents who face real costs of communication along with bounds to rationality and calculation exchange is entirely decentralized it is initiated by individual agents who broadcast costly messages indicating their interest in trade it is accomplished by bilateral bargaining between pairs of agents agents use the information gained from previous attempts at local trade to calculate their search strategies for succeeding rounds this decentralized mechanism can achieve a substantial improvement in the allocation of resources and the average welfare of agents in comparison with a randomized initial endowment but in comparison with walrasian equilibrium agents who begin with endowments of equal value end up with substantially unequal wealth although the initial inequality of utility is reduced

strategic trading behavior and price distortion in a manipulated market anatomy of a squeeze abstract this paper investigates an attempted delivery squeeze in a bond futures contract traded in london using cash and futures trades of dealers and customers we analyze their strategic trading behavior price distortion and learning in a market manipulation setting we argue that marked differences in settlement failure penalties in the cash and futures markets create conditions that favor squeezes we recommend that regulators require special flagging of forward term repurchase agreements on the key deliverables that span futures contract maturity dates and that exchanges mark to market their contract specifications more frequently or consider a cash settled contract on a basket of bonds

from microlevel decisions to landscape changes an assessment of agricultural conservation policies the growth in conservation programs has created a need for modeling frameworks capable of measuring microlevel behavioral responses and macrolevel landscape changes this paper presents an empirical model that predicts farmers production practices and the resulting levels of agricultural runoffs at more than 42 000 agricultural sites in the upper mississippi river basin under alternative conservation policies results suggest that payments for conservation tillage and crop rotations increase the use of these conservation practices however the acreage response is inelastic and the programs are not likely to be cost effective on their own for addressing hypoxia problem in the gulf of mexico

discovering the link between inflation rates and inflation uncertainty a new time series model is used to reassess the strength of the link between inflation uncertainty and the level of inflation in the united states the model provides several statistical measures that can be used to examine different aspects of uncertainty the main finding is that uncertainty about the long rather than short term prospects for inflation moved strongly with the rate of inflation since the early 1970s copyright 1991 by ohio state university press

the default rate experience on high yield corporate debt recent 1978 83 net returns on high yield low rated debt have been impressive averaging 490 to 580 basis points above the long term government bond index but low rated junk bonds pose a risk of default not present in the higher rated segment of the bond market the authors divided the par value of defaulting debt by total low rated straight debt outstanding to arrive at an estimate of the default rate for high yield bonds excluding johns manville which had the only defaulting debt rated investment grade just prior to the default date for the 1974 84 period this averaged 1 52 per cent or 152 basis points annually year to year variations in the rate were substantial furthermore default experience differed across various industry segments railroads and reits were particularly vulnerable to default in the past although they are unlikely to represent a large portion of future defaults retailer electronic computer airline and oil and gas defaults have become more common in recent years losses from default are actually lower than the default rate alone implies defaulted bonds traded on average at 41 per cent of par shortly after default after accounting for the bonds retained value and the loss of interest the average reduction in return to the investor who had purchased the bonds at par would have been in the range of 96 to 100 basis points annually

an analysis of forecasts of livestock prices abstract the paper studies forecasts of u s hog and cattle prices provided by both a commodity expert and organized futures markets some have argued that futures prices should be efficient forecasts of actual cash prices we show that cattle futures prices are outperformed by the expert for hogs futures prices and the expert are about equal analysis of a vector autoregression of the expert s forecasts the futures prices and actual cash prices supports the finding that cattle futures prices are not an efficient forecast of actual cash prices differing supply dynamics may account for the difference

an examination of the necessary and sufjicient conditions for market eflciency the case of hogs the pricing efficiency of the live hog futures market is examined utilizing both necessary and sufficient conditions out of sample forecasts from an econometric model an arima model and a composite forecasting model are compared with the forward prices of the futures market within a mean squared error framework at least one model and frequently all of them forecast more accurately than the futures market a necessary condition for market efficiency the sufficient condition is assessed using simulated market trading strategies based o n the most accurate model forecasts results suggest that informational inefficiencies exist in the live hog futures market

potential environmental impacts of increased reliance on corn based bioenergy this paper integrates economic and physical models to assess a how increases in agricultural commodity prices driven by ethanol production and other factors affect land use and cropping systems in the us midwest and b how the changes in land use and cropping systems in turn affect environmental quality in the region the empirical framework includes a set of econometric models that predict land conversion crop choices and crop rotations at the parcel level based on commodity prices land quality climate conditions and other physical characteristics at the sites the predictions are then combined with site specific environmental production functions to determine the effect of rising commodity prices on nitrate runoff and leaching soil water and wind erosion and carbon sequestration results suggest that increasing commodity prices will result in widespread conversions of non cropland to cropland fifty percent of the region s pasture and range land will be converted to cropland with 6 corn rising commodity prices will also result in dramatic changes in crop mix and rotation systems in the midwest with 6 corn the total acreage of corn will increase by 23 and 40 in the corn belt and lake states respectively the acreage of continuous corn will increase considerably in both regions as well these changes in land use and crop mix will have a large impact on agricultural pollution approaches to mitigating the environmental impacts are discussed

optimal hedging in futures markets with multiple delivery specifications nearly all futures contracts allow delivery of any of several qualities of the underlying asset consequently the price of the futures contract is associated more with the price of the expected cheapest deliverable variety than with the price of the par delivery variety the delivery specifications introduce a delivery risk for every hedger in the market we derive the optimal hedging strategies in these markets their hedging effectiveness is evaluated for wheat futures contracts in chicago hedging optimally would have significantly reduced the variance of the rates of return on hedges while yielding similar mean returns nearly all futures contracts on commodities and financial assets allow the seller to deliver any of several qualities of the underlying asset the contracts specify discounts or premiums for delivering a nonpar quality but the realized price differences can be significantly different consequently the futures price on a delivery date converges to the spot price of the quality that is cheapest to deliver rather than the spot price of the par delivery quality since it is uncertain which quality will be the cheapest to deliver this introduces a delivery risk for every hedger in the market gay and manaster 9 and kane and marcus 13 find that hedgers in the treasury bond futures market have neither hedged nor exploited the delivery specifications in an optimal way 1 this paper addresses how to hedge optimally in futures markets with multiple delivery specifications 2 we derive the optimal hedging strategies and evaluate their hedging effectiveness futures markets are hedging markets working 20 they enable traders to hedge the risk of unexpected changes in the spot price of their asset the hedging effectiveness of futures markets is therefore an important issue earlier studies include ederington 3 figlewski 5 and koppenhaver 16 among others this study also differs from those studies in that we evaluate an ex ante hedging

difference systems in financial futures markets many financial futures markets allow substitutions for the par grade of security at delivery substitutes are deliverable at premiums or discounts differences in commodities parlance to the futures price the rule that establishes these differences is called a difference system this paper characterizes financial futures market equilibrium with yield based difference systems and investigates particular systems in use the major finding is that currently used difference systems effectively limit deliverable supply in the futures markets and lead to futures prices which understate the cash market price of the par security in order to increase deliverable supply many financial futures markets allow the delivery of a variety of grades issues of securities in fulfillment of a financial futures contract the par grade of security on which the futures contract is based is deliverable at the futures price various other grades of securities are deliverable at premiums or discounts to the futures price in commodities parlance these premiums and discounts are called differences and the rule that establishes the set of premiums and discounts is called a difference system see hoffman 2 chapter xv for an excellent discussion of difference systems in commodity futures contracts there are two types of difference systems currently in use in financial futures markets both are based on security yields the first is called variable rate or yield maintenance pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted by the yield of the par security selling at the futures price the second is called fixed rate or factor pricing under this system nonpar securities are deliverable at the futures price times a factor which is the price of the delivered security relative to the par security where both are discounted at the yield of the par security selling at par this paper first characterizes financial futures market equilibrium with yieldbased difference systems and then investigates theoretically and empirically the particular characteristics of factor pricing and yield maintenance pricing the major finding is that currently used differences systems produce financial futures prices which systematically understate the spot market price of the par security vice president chicago mercantile exchange this research was conducted while the author was economist financial studies section board of governors of the federal reserve system the opinions in this paper are those of the author and do not necessarily reflect the opinions of the board

forecasting and hedging an illustration of risk reduction in the hog industry hog producers and first handlers can reduce the risk of unfavorable price fluctuations by combining the information from forecasting models with a selective hedging strategy six quarterly price forecasting approaches econometric arima expert naive and two composites were evaluated over the 1976 82 period using a simple yet pragmatic hedging decision rule the results indicate that relatively modest improvements in prices received by producers or paid by first handlers relative to cash marketing were possible statistically significant reductions in short term risk exposure were achieved by both groups through most of the approaches evaluated

forecasting performance of corn and soybean harvest futures contracts in contrast to earlier periods post 1973 spring prices of december corn and november soybean futures contracts have not been good forecasts of harvest price regression analysis of price forecast variance before and after 1973 indicates that the decline in forecasting accuracy is related to increased yield forecast errors and to reduced interference of government loan rates on market price determination since these futures are poor forecasts producers should not rely on futures prices alone to allocate resources at planting time unless they simultaneously forward price

forecast performance of wasde price projections for u s corn we conduct a comprehensive evaluation of the season average price projections for u s corn as published by the u s department of agriculture s world agricultural supply and demand estimates wasde an important issue given reduced resources and increased program scrutiny within the federal government this study is the first in the literature to evaluate the wasde corn projections relative to futures adjusted forecasts throughout the forecasting cycle using a lengthy evaluation period 1980 81 2012 13 we find that wasde projections provide lower rmses relative to futures adjusted forecasts for 9 of the 16 forecast periods 4 of which are statistically different encompassing tests show that wasde projections often provide incremental information not present in the futures adjusted forecasts composite forecasts based on futures adjusted forecasts and wasde projections reduced the rmses over all forecast periods by an average 12 16 favorable average trading profits may be generated for some forecast months using wasde projections overall our results suggest that wasde projections of the u s corn season average price provide useful information to the market and could enhance the efficiency of the agricultural sector

agents come to bits towards a constructive comprehensive taxonomy of economic entities abstract mirowski mirowski p 2007 markets come to bits evolution computation and markomata in economic science journal of economic behavior and organization 63 209 242 argues for a constructive approach to economic modeling centered on markets as evolving computational entities this essay counters that a broader constructive approach to economic modeling can and should be taken the recent advent of powerful computer technologies supporting agent based modeling abm renders feasible the computational study of economies modeled as evolving systems of interacting agents in abm an agent refers broadly to bundled data and behavioral methods representing an entity constituting part of a computationally constructed world examples of possible agent referents include individuals social groupings institutions e g markets biological entities such as crops and physical entities such as transportation networks and weather consequently abm provides tremendous opportunities for economists and other social scientists to tailor the breadth and depth of the entities represented in their models to the application at hand a simple abm of a two sector decentralized market economy is used for concrete illustration

quality option profits switching option profits and variation margin costs an evaluation of their size and impact on treasury bond futures prices this paper provides empirical evidenee that the quality option in f bond futures is much less valuable than previously indicated in addition a dynamic trading strategy involving multiple switches of the cash bonds held in a long cash versus short futures position is shown to produce substantially greater profits than the single exercise of the quality op tion these findings suggest that the optimal management of long cash short futures positions is likely to involve dynamic trading strategies while passive strategies appear more appropriate for short cash long futures positions it is also shown that required variation margin payments are frequently large and may impact the profitability and risk of such positions to a greater extent than either of these options further evidenee is given indicating that observed t bond futures prices reflect an imputed value for the options and risks inherent in such positions

quasi rational and ex ante price expectations in commodity supply models an empirical analysis of the us broiler market a statistically optimal inference about agents ex ante price expectations within the us broiler market is derived using futures prices of related commodities along with a quasi rational forecasting regression equation the modelling approach which builds on a hamilton type framework includes endogenous production and allows expected cash price to be decomposed into anticipated and unanticipated components we therefore infer the relative importance of various informational sources in expectation formation results show that in addition to the quasi rational forecast the true supply shock future prices and ex post commodity price forecast errors have at times been influential in broiler producers price expectations copyright 2003 john wiley sons ltd

real and nominal interest rates under uncertainty the fisher theorem and the term structure this paper examines the relation between nominal and real interest rates and the nominal and real term structure under uncertainty we show that two separate risk terms cause the fisher theorem to fail one risk term is related only to the variability of money prices while the other is related to the purchasing power riskiness of the nominal bond monetary policy can affect the value of both these risk terms we also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia even if the economy is neutral with respect to monetary policy monetary policy can alter the nominal term structure

why haven t nominal rates declined the capital asset pricing model can be used to help explain the seemingly anomalous behavior of interest rates over the past several years specifically an examination of the covariances between the market returns and real unexpected rates of return on stocks bills and bonds of various durations indicates that the variance of return on longer term bonds increased appreciably between 1977 79 and 1980 81 while their correlations with stock returns rose the relative risk premiums on these bonds should have risen accordingly the calculated real risk premium on bonds of eight years duration did increase significantly between june 1979 and december 1981 it is entirely possible that this increase more than offset any decline in the long term expected inflation rate although risk alone cannot account for the increase in the real short term rate the timing of the increase suggests a possible correlation with the change in the federal reserve s operating procedures in october 1979 the puzzle of the flat nominal yield curve in the early 1980s may not be a puzzle at all

on the expectations view of the term structure term premia and survey based expectations in this paper uk disaggregate survey data of expected future interest rates are used to test the expectations model of the term structure of interest rates at the short end of the maturity spectrum in the aggregate the expectations model is rejected and both time varying term premia and expected interest rate changes are demonstrated to be important in explaining the slope of the yield curve within the aggregate data however we demonstrate that there are some differences with respect to the views of the term structure held for example for some individuals the pure expectations model cannot be rejected

inflation and real interest rates on assets with different risk characteristics given the importance of ex ante real interest rates to economic decision making it is no surprise that much empirical research focuses on them 1 several recent studies find that the ex ante real returns for short term u s treasury securities are not constant and are negatively correlated both with inflation and with nominal interest rates this paper examines the extent to which these findings hold for assets of longer maturity are robust with respect to the choice of price index and are stable over time we expand the set of assets studied to include those of longer maturity both publicly and privately issued for two reasons first their ex ante real returns may differ substantially from that of a short term nominally riskless security second because longer maturity assets have risk characteristics closer to capital their ex ante real returns are potentially more relevant for investment and savings decisions we explore the use of various price indices because the index used in most studies the consumer price index severely overstates inflation during the 1970s as a result of its inappropriate treatment of residential housing costs 2 this overstatement casts doubt on an important finding of previous studies that there are long stretches of time during the 1970s when ex ante real rates are significantly negative given the existence of holding costs for the goods relevant to most price indices and the absence of a riskless real return no arbitrage conditions are violated by a negative ex ante real rate however its persistence is problematical because asset holders are typically assumed to have a positive rate of time preference which ensures a positive ex ante real rate in the long run we find that before 1979 a negative relationship of ex ante real rates both with inflation and with nominal interest rates appears for the longer maturity assets as well as the short term nominally riskless asset indeed the relationship grows

on the perils of financial intermediaries setting security prices the mutual fund wild card option economic distortions can arise when financial claims trade at prices set by an intermediary rather than direct negotiation between principals we demonstrate the problem in a specific context the exchange of open end mutual fund shares mutual funds typically set fund share price nav using an algorithm that fails to account for nonsynchronous trading in the fund s underlying securities this results in predictable changes in nav which lead to exploitable trading opportunities a modification to the pricing algorithm that corrects for nonsynchronous trading eliminates much of the predictability however there are many other potential sources of distortion when intermediaries set prices copyright the american finance association 2001

the long term structure of commodity futures futures markets on agricultural commodities typically trade with maximum maturity dates of less than four years if these markets did trade with maturities eight or ten years distant futures prices would have value as price forecasts and as a way to structure long term swaps and insurance contracts agricultural commodity markets generally exhibit mean reversion in spot prices and convenience yields spot markets also exhibit seasonality this study develops and implements a procedure to generate long term futures curves from existing futures prices data on lean hogs and soybeans are used to show that the method provides plausible results copyright 2012 oxford university press

understanding real interest rates this paper outlines an approach to measuring real interest rates and testing hypotheses on their behavior it then describes what we know about real interest rates in the aggregate economy and provides estimates of real interest rates for the agricultural sector the evidence presented in this paper indicates that real interest rates for the agricultural economy have been extremely high in the l98ds and that their behavior seems to be linked to that found for real rates in the aggregate economy what has been the source of these high real rates the answer seems to be that it was a result of a concerted effort by the monetary authorities to disinflate the economy however the brunt of the fed s disinflationary policy has fallen more heavily on the farm sector which has had to face far higher reel rates than the rest of the economy although breaking the back of inflation was certainly a worthy goal for the fed farmers have had to pay a heavy price they have had to suffer for the sins of an economy that was excessively inflationary which then had to be brought back into line with disinflationary policy this abstract was borrowed from another version of this item

heterogeneous information and the theory of the business cycle the inability to observe the money supply and price level has been an essential ingredient of informational based equilibrium models of cycles here we assume these data are available but show that heterogeneous information about the productivity of capital can lead to a monetary theory of fluctuations in equilibrium each agent s investment depends on the difference between his own productivity and the perceived real rate in the presence of money demand shocks the nominal rate is noisy signal of the real rate this leads to greater fluctuations in output than if all agents had the same information

intertemporal commodity futures hedging and the production decision this paper deals with the producer s optimal use of commodity futures in hedging the framework for analysis is an intertemporal consumption and investment model the producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval during the period he faces both price and output uncertainties in applying stochastic dynamic programming methods this paper shows the effect of these risks on his consumption behavior further the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions finally implications of these results on the futures markets are discussed this paper studies a normative model of the farmer s optimal hedging strategy and consumption behavior in a continuous time framework recent papers for example berck 3 rolfo 18 stoll 21 have analyzed the farmer s hedging strategies in a one period context these papers have provided interesting insights into the farmer s production decisions and the optimal design of futures contracts and markets however in a one period model some rather restrictive conditions are imposed on the individual s behavior for example in these models an individual is assumed to ignore any information arrival process as a result the individual is assumed to adjust neither consumption behavior nor hedging positions to the changing state of the world during the production period these conditions can be relaxed in a continuous time framework in an intertemporal context the farmer s hedging problem may be viewed as follows since the farm income at harvest depends on both the spot price and the output in bushels the farmer is subject to both price and output uncertainties during the production period 1 when the farmer can hedge only in the commodity futures market he cannot eliminate both the price and output uncertainties by any hedging strategy 2 as the farm income represents a significant portion of his wealth he must necessarily hold an undiversified portfolio during the production period therefore in essence the farmer must solve for his investment consumption behavior and his hedging strategy facing the nonmarketable asset problem mayers 14 in a multiperiod framework in this context one can see intuitively the major difference between a one

forecast encompassing as the necessary condition to reject futures market efficiency fluid milk futures the traditional necessary condition for futures market inefficiency is the existence of alternative forecasting methods that produce mean squared forecast errors smaller than the futures market here a more exacting requirement for futures market efficiency is proposed forecast encompassing using the procedure of harvey and newbold multiple forecast encompassing is tested using chicago mercantile exchange fluid milk futures time series models and usda experts provide competing forecasts results suggest milk futures do not encompass the information contained in the usda forecasts at a two quarter horizon while the competing forecasts generate positive revenues it is unlikely that returns exceed transaction costs in this relatively new market

from cradle to grave how to loot a 401 k plan abstract the regulations governing asset distributions from many retirement plans give participants the option to time retirement or rollovers from the plan strategically they possess a long lived put option whose exercise price resets periodically to the current value of the assets in the plan i derive a recursive closed form valuation formula for the option and develop a numerical algorithm for implementing the result i find that for reasonable assumptions about volatility and life expectancy the option s value may approach 40 of the value of the assets in the plan financed entirely by those still contributing this wealth transfer can however be easily avoided by making a simple change to the current regulations governing valuation and payout of these retirement plans

cash marketing styles and performance persistence much agricultural economics research has been dedicated to determining the best time for producers to sell their commodities unlike this past research we look at how producers actually sell commodities the extent to which producers display an active or mechanical marketing style is measured using individual farmer sales the activeness of a producer s marketing strategy is measured by how much the timing of their strategy varies from year to year results show no relationship between activeness and net prices received furthermore the results show no evidence of performance persistence by individual producers

introduction to the special issue on agent based computational economics abstract a brief overview of agent based computational economics ace is given followed by a synopsis of the articles included in this special issue on ace and in a companion special issue on ace scheduled to appear in computational economics