the behavior of futures prices a review of theory and evidence how do futures prices behave the evidence indicates that they are typically a biased predictor of spot prices at maturity however the typical contention that this bias reflects the existence of a seasonal risk premium is not strongly supported by observations although futures markets are used by risk averse producers seeking the insurance offered by risk bearing speculators hedgers have been able to buy their insurance relatively cheaply in many cases even profiting from their futures trading speculators earnings seem to depend on their forecasting skills not on the mere existence of a risk premium other evidence suggests that the existence of a bias in a particular market owes more to the unique characteristics of the underlying commodity than to the market s structural characteristics tests of the random character of futures prices have found some degree of serial dependence but it is not clear whether these dependencies can be profitably exploited studies of the volatility of futures price indicate that volatility changes over the life of a contract the changes appear to depend upon distributions of the underlying state variables and the time to maturity with the seasonal state variable effect being dominant so that volatility may rise or fall over the contract s life multiperiod equilibrium pricing models of futures and forward contracts show that the futures and forward prices usually differ because of marking to market in the futures market unlike forward trading futures trading represents speculation on both the instantaneous interest rates and the spot prices consequently futures prices depend on the comovement of spot prices and interest rates

financial futures hedging via goal programming this paper presents multiperiod multiple objective goal programming as an alternative to the more conventional hedge ratio approaches to financial futures hedging the described model offers the potential benefits of i simultaneous achievement of multiple hedge related objectives i e minimization of transactions and margin opportunity costs regulation of cash flow and maximization of profits accruing from both the cash and futures positions and ii periodic modification and updating of the futures position as suggested by actual observed prices and interest rates throughout the hedging period to assess its overall effectiveness the model was applied to develop appropriate hedging strategies for three separate time periods each representing a unique interest rate trend i e upward movement downward movement and no change since real world implementation of the model requires the use of forecast data independent forecasts of both cash and futures prices were generated via 1 moving average 2 exponential smoothing and 3 random walk techniques in progressing through each of the 13 week time periods all forecasts were updated with the previous weeks actual price data revised forecasts and actual price data were then incorporated into the model constraints on a weekly schedule this approach in essence provided weekly futures activity recommendations based on the most recent price and interest rate developments observed at any point during the hedging period the realized gains or losses were then compared to the previously derived perfect foresight model results and to the traditional hedge ratio results this allowed for evaluation of the model s effectiveness under varying forecast methods and varying interest rate trends the results show that the goal programming model outperformed other strategies in most cases

the effects of decision making on futures price volatility existing literature on commodity futures price volatility emphasizes time to expiration and the resolution of uncertainty in this paper we stress the supply and demand inflexibilities arising from decision making a decision made on the supply demand side makes future supply demand responses less elastic therefore a shock arising after a decision is made is more effective in changing the futures price than a shock before the decision is made the results support the time to maturity hypothesis but do not conflict with the state variable hypotheses of futures price volatility evidence supporting the impacts of inflexibilities are presented for corn soybean and wheat contracts

monetary policy matters abstract this paper addresses hoover and perez s comments on our 1989 paper we first show that the estimated impact of monetary policy shifts remains large and ranges from marginally to strongly significant when oil shocks are controlled for we then extend our previous work by expanding the sample period and identifying an additional policy shift in december 1988 with this extension the estimated effects of monetary policy shifts are large and highly significant for all reasonable specifications of oil shocks we also demonstrate that hoover and perez s other objections have little bearing on our conclusions

risk aversion and the recommended hedging ratio in a recent article in this journal kahl reviewed the existing literature on the determination of optimal futures and cash market positions the optimal hedging ratios were found to depend on whether the cash position was treated as endogenous or predetermined and some general implications were set forth the surprising conclusion was that the optimal hedging ratio is independent of the individual s risk aversion even though the optimal positions in the cash and futures markets are themselves not independent of the risk parameter kahl demonstrates that this conclusion

the minimum variance hedge ratio under stochastic interest rates in an environment where interest rates are stochastic we examine the case of a pure hedger endowed with a fixed position in a long term bond in contrast to conventional wisdom according to which the difference between hedging through forward contracts and futures is immaterial it turns out that the minimum variance hedge ratio using forwards comprises two terms instead of one only when using futures the magnitude of the difference between the two hedge ratios may be important under some plausible assumptions this result is due to the presence of additional interest rate risk that bears on the profit and loss statement associated with the forward position this sheds some additional light on the respective features of forward and futures contracts written on interest rate sensitive securities

why do farmers have so little interest in futures markets a farm financial model with leverage and investment in two farm enterprises is specified the model is extended to incorporate futures hedging and the separation theorem is used to show that optimal hedging is zero the assumption of a risk free asset is relaxed and while this leads to a violation of the separation theorem the result that optimal hedging is zero is maintained providing that futures markets are efficient it is concluded that if capital markets are efficient then farmers will have little interest in futures markets except to speculate

on the accuracy of the mean variance approximation for futures markets abstract simple approximate fomulae for the volume and gains from futures trading are derived using the mean variance model the errors involved are exactly quantified and shown to be negligible for the futures price and welfare gains though potentially larger for volumes

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

an equilibrium analysis of hedging with liquidity constraints speculation and government price subsidy in a commodity market we develop a simple commodity model to analyze i the effects of hedgying with liquidity constraints due to producers inability to bear unlimited trading losses ii the role of speculation in the process of risk allocation between consumers and producers and iii the equilibrium implications of government price subsidies to the producers we find that 1 liquidity constraints can cause futures prices to exhibit mean reversion which then makes speculation profitable 2 speculation tends to make futures price volatility an increasing function of futures price and 3 government price subsidy if actively hedged by the producers serves to lower the futures risk premium and reduce futures volatility commodity spot and futures prices are determined by the following types of market participants producers consumers speculators and governments producers have generally taken short futures positions in order to hedge against price declines consumers have generally taken long futures positions in order to hedge against price increases speculators who neither produce nor intend to consume the commodity are present in the spot and futures markets for the purpose of making a profit governments play significant roles in the markets by providing producers with various support programs and in some cases by directly intervening in the markets to affect commodity prices or adjust inventory levels the traditional approach to commodity futures pricing has been based on the theory of storage 1 as fama and french 1987 1988 show this approach to commodity pricing is particularly useful for explaining the basis movement as a function of inventory levels based on the hypothesis that the marginal convenience yield on inventory declines at a decreasing rate as

the time pattern of hedging and the volatility of futures prices the paper proposes a multi period model of hedging which allows for a futures position to be revised within the cash market holding period within this framework we assess the robustness of the two period theory of hedging when generalized to many periods we characterize the normal time path of a hedge and the way it is affected by the requirement that futures accounts mark to market daily finally we show how the resolution of production uncertainty over time affects hedging behavior and determines the volatility of futures prices in the large literature on hedging in futures markets the principal analytical accounts of hedging are framed in a two trade date setting an agent commits himself now to a future purchase or sale of a good whose cash price later is uncertain this risk is hedged by purchase or sale of an appropriate number of futures contracts and holding this futures position until the cash transaction is realized in the present paper we formulate a multi period model of hedging which allows for the futures position to be revised within the cash market holding period the resulting analysis captures an important institutional reality that is absent in a two trade date model namely the fact that the day to day fluctuations of the futures price will generate a series of random cash flows over the period during which a futures position is held this is due to the requirement that futures accounts mark to market daily within this framework we address a number of issues first we assess the robustness of the two period theory of hedging when generalized to many periods second we characterize the normal time path of a hedge and contrast futures and forward contracts from the perspective of an individual hedger finally we show how the resolution of production uncertainty over time affects hedging behaviour and determines the volatility of futures prices while the literature on asset demand in a multiperiod setting is large futures markets are specifically treated in a limited number of studies grauer and litzenberger 1976 are concerned principally with characterizing the relation of spot and futures prices in a market for a storable periodically produced commodity they offer a rationale for positive stock holding in markets where spot price exceeds the futures price richard and sundaresan 1980 are also concerned primarily with characterizing price behaviour since they posit identical consumers in equilibrium individual holdings of futures are zero there is no hedging activity in the sense that we understand it breeden 1980b analyzes the optimal futures position sizes in a multiperiod setting his framework is more general than ours in that his is a multi good multi asset model where preferences

the behavior of forward looking firms in the very short run the study develops a theory of very short run forward looking behavior allowing for forward trading and storage of final good and material input production and storage are separable from hedging decisions and depend only upon current forward and cash prices comparative statics are derived regarding production purchases and sales the hypotheses advanced are tested with monthly data pertaining to the u s soybean processing industry results suggest that in short run equilibrium futures prices of the soybean complex have had little influence on crushings or production but they have been important determinants of inventory levels

money politics and the post war business cycle abstract the political economy literature has enshrined as stylized fact the view that lower inflation and temporarily lower growth follow the election of republican presidents and has emphasized political manipulation of monetary policy as an explanation support for the monetary explanation comes in econometric work that largely ignores identification issues that dominate the literature on measuring the effects of monetary policy we generalize a standard vector autoregression framework to accommodate discrete political party variables we find almost no support for the view that political effects on the macroeconomy operate through monetary policy and only weak evidence that political effects are significant at all

returns to individual traders of futures aggregate results by means of a data set previously unavailable for academic research actual trading histories of individual futures traders are examined with this more detailed data the author is able to 1 test the risk return hypothesis directly 2 include a much larger segment of the market than before and 3 use actual instead of hypothetical t rading strategies it is shown that the commercial hedging traders are most profitable while noncommercial speculative traders earn n egative or zero profits because speculators are not receiving reward s for the risks they willingly absorb the theory of normal backwarda tion and its extension can be rejected copyright 1987 by university of chicago press

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

optimal hedging and equilibrium in a dynamic futures market abstract this paper considers an agent maximizing the expected utility of the sum of the terminal value of a fixed portfolio of spot market assets and the terminal value of a margin account on a futures trading position closed form solutions for the optimal hedging strategy are provided in several special cases

toward a positive economic theory of hedging the hedging models developed over the last half century are evaluated for their ability to explain the actual hedging behavior of the various economic agents this evaluation shows a total lack of a reasonable positive model of hedging behavior while each class of existing models predicts some observed behavior none is able to predict the broad range of actions that is easily observed in the real world in this paper i develop such a model and include a plausible and coldly rational economic explanation for why farmers don t hedge at all while merchandisers with identical risk attitudes will fully hedge

floating exchange rates and inflation in germany are external shocks really irrelevant abstract german prices and u s short term interest rates are cointegrated while short term interest rates in both countries are not therefore moving to flexible exchange rates in 1973 has not completely isolated germany from external shocks

the rationale of the mean standard deviation analysis skewness preference and the demand for money publisher summary this chapter discusses the rationale of the mean standard deviation analysis skewness preference and the demand for money in january 1969 issue of the review of economic studies karl borch and martin feldstein separately criticized the widely used mean variance analysis of portfolio selection borch contended that any system of upward sloping mean standard deviation e s indifference curves can be shown to be inconsistent with the basic axiom of choice under uncertainty he pointed out that one can always pick any two points on an upward sloping indifference curve to represent two bernoulli distributions with probability 1 p of gaining the same amount x in both the cases and probability p of gaining y1 in the case of one distribution and y2 in the case of the second distribution with y2 y1 if the second distribution represents the point to the northeast of the other point then by the dominance axiom the second distribution must be preferred to the first which contradicts the basic meaning of indifference curves feldstein by using a log utility function and a lognormal distribution for investment outcome showed that e s indifference curves for a risk averter need not be convex downwards though upward sloping they would change from convex to concave once the standard deviation of the outcome exceeds the mean multiplied by on the face of it this seems to suggest that risk aversion might decrease as risk is increased beyond a certain extent

theory of the firm with joint price and output risk and a forward market expected utility maximizing farmers facing just price risk or both price risk and quantity risk behave similarly in the absence of a forward market if forward contracting is possible that is not true because variation in the commodity price affects a farmer s wealth through the value of his futures position the value of his output and through the covariance between price and output this covariance affects a farmer s optimal scale of production his optimal forward position and the interrelationship between the scale of production and forward trading

determination of the recommended hedging ratio the traditional literature on commodity futures markets defined a hedge as a futures market position which is equal but opposite to the individual s cash market position more recent studies have recognized that the futures market position need not equal the cash market position to constitute a hedge many researchers have theoretically solved for the optimal futures and cash market positions for example heifner johnson ward and fletcher and telser determined the optimal futures and cash market positions simultaneously peck determined the optimal futures market position assuming that the cash market position was given the formulas for the optimal futures and cash holdings differ from study to study because of the different underlying assumptions however general implications can be deduced from these studies concerning the size of the optimal hedging ratio i e the ratio of the optimal futures position to the optimal cash position in this paper it is argued that the optimal hedging ratios consistent with the results obtained by johnson ward and fletcher and telser are identical to the optimal hedging ratio derived byheifner 1972 1973 the exercise provides a major implication for hedging strategy which is consistent with all of these studies that the optimal hedging ratio is independent of the individual s risk aversion even though the optimal positions are themselves not independent of the risk parameter this implication is also valid for the minimum risk hedging ratio derived by johnson ederington and mckinnon finally the optimal hedging ratio in peck remains dependent on the risk parameter because the cash market position is assumed to be given

small distributed generation versus centralised supply a social cost benefit analysis in the residential and service sectors abstract this paper aims at measuring the social benefits of small chp distributed generation dg in the residential and service sectors we do this by comparing the social costs of decentralised and centralised supplies simulating ideal situations in which any source of allocative inefficiencies is eliminated this comparison focuses on assessing internal and external costs the internal costs are calculated by simulating the optimal prices of the electricity and gas inputs the external costs are estimated by using and elaborating the results of the dissemination process of the externe project one of the most recent and accurate methodologies in this field the analysis takes into account the main sources of uncertainty about the parameter values including uncertainty about external cost estimations despite these sources of uncertainty the paper concludes that centralised supply is still preferable to small dg in fact the overall range of dg social competitiveness is restricted even considering further remarkable improvements in dg electrical efficiency and investment costs the results are particularly unfavourable for the residential sector whereas in the service sector the performance of dg technologies is slightly better

optimal dynamic hedging in unbiased futures markets a discrete time dynamic hedging problem is solved under expected utility maximization and basis risk without imposing a particular parametric form for utility nor assuming normally distributed cash and futures prices the solution is valid for any increasing and strictly concave utility function and for quite general specifications of the joint distribution of cash and futures prices this generality is achieved by restricting the futures market to be unbiased and requiring that the size of the cash position be nonstochastic the dynamic hedging rule can be estimated empirically using similar methods to those used to estimate static hedge ratios

symposium on global climate change since the industrial revolution increased use of fossil fuels has been strongly linked with economic growth in recent years many scientists have argued that carbon dioxide emissions from fossil fuel combustion are likely to make the earth s climate warmer and some have argued that the consequences could be disastrous global climate change and policies to slow it or adapt to it may be among the primary forces shaping the world s economy throughout the next century and beyond nonetheless popular treatments of this issue commonly ignore economics and assume that if society learns that any warming is likely as a result of human activity we should do whatever is necessary to stop it this seems to reflect the widespread view that environmental issues involve rights and wrongs not costs and benefits and that environmental policy should eliminate contamination not replace missing markets 1 on this view human activity that may alter the earth s climate risks fouling our nest on a massive scale it is simply wrong and must be stopped regardless of cost economics has also been neglected in the pronouncements of the intergovernmental panel on climate change ipcc which was established in 1988 primarily to inform international negotiations on climate change policy 2 the ipcc has produced useful assessments of relevant scientific information but

oil and the macroeconomy since world war ii all but one of the u s recessions since world war ii have been preceded typically with a lag of around three fourths of a year by a dramatic increase in the price of crude petroleum this does not mean that oil shocks caused these recessions evidence is presented however that even over the period 1948 72 this correlation is statistically significant and nonspurious supporting the proposition that oil shocks were a contributing factor in at least some of the u s recessions prior to 1972 by extension energy price increases may account for much of post opec macroeconomic performance

market volatility and the dynamic hedging of multi commodity price risk commodity cash and futures prices experienced a severe boom and bust cycle between 2006 and 2009 increases in commodity price volatility have raised concerns about the usefulness of commodity futures and options as risk management tools dynamic hedging strategies have the potential to improve risk management when conditional co variances depart significantly from their unconditional long run counterparts and may be useful to decision makers despite their greater complexity and higher transaction costs we propose a nonparametric copula based generalized autoregressive conditional heteroscedastic npc garch approach to estimate time varying hedge ratios and evaluate the benefits of dynamic hedging during four sub periods between 2000 and 2011 using a stylized texas cattle feedlot management problem the npc garch approach allows for a flexible nonlinear and asymmetric dependence structure between cash and futures prices for different commodities we find that npc garch dynamic hedging performs bette

landlords and farmers implications of disparities in bargaining power for tenancy in agriculture abstract the equilibrium allocation of owner operated and rental land in the agricultural sector is examined given risk averse agents risky returns and asset price risk the model is extended to account for disparities in bargaining power among landlords and farmers in the absence of disparities the competitive equilibrium allocation satisfies the general conditions for optimal risk sharing with an adjustment factor similar to the optimal hedge ratio differences in bargaining power result in deviations from the optimal risk sharing conditions numerical simulations of tenancy structure are conducted for a developed agricultural economy exposed to various forms of risk estimates of parameter values representing the riskiness of returns and asset prices in this study are based on vector auto regressive techniques the simulations show that a substantial reduction of the rental ratio is obtained in a situation where farmers are equally or more risk averse than landlords consequently the results indicate that the importance of the tenancy institution as a risk sharing mechanism is severely mitigated in the presence of asset price risk risky returns relatively risk averse farmers and disparities in bargaining power

a comparison of the effects of exogenous oil supply shocks on output and inflation in the g7 countries a comparison of the effects of exogenous shocks to global crude oil production on seven major industrialized economies suggests a fair degree of similarity in the real growth responses an exogenous oil supply disruption typically causes a temporary reduction in real gdp growth that is concentrated in the second year after the shock inflation responses are more varied the median cpi inflation response peaks after three to four quarters exogenous oil supply disruptions need not generate sustained inflation or stagflation typical responses include a fall in the real wage higher short term interest rates and a depreciating currency with respect to the dollar despite many qualitative similarities there is strong statistical evidence that the responses to exogenous oil supply disruptions differ across g7 countries for suitable subsets of countries homogeneity cannot be ruled out a counterfactual historical exercise suggests that the evolution of cpi inflation in the g7 countries would have been similar overall to the actual path even in the absence of exogenous shocks to oil production consistent with a monetary explanation of the inflation of the 1970s there is no evidence that the 1973 1974 and 2002 2003 oil supply shocks had a substantial impact on real growth in any g7 country whereas the 1978 1979 1980 and 1990 1991 shocks contributed to lower growth in at least some g7 countries jel e31 e32 q43

atheoretical macroeconometrics a critique abstract the spurious nature of the restrictions used to identify many macroeconometric models has led some researchers to advocate a style of econometric inquiry that is less dependent on prior theoretical restrictions of the sort that were central to the approach of the cowles commission this development which we call atheoretical macroeconometrics is summarized and evaluated in the current paper it is contrasted with an updated version of the cowles commission approach we conclude that while some of the exercises of atheoretical macroeconometrics are valid those that have attracted the most attention and appear the most innovative exogeneity testing impulse response analysis and policy analysis using estimated vector autoregressions are based on incorrect analysis

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

optimal hedge ratios with risk neutral producers and nonlinear borrowing costs a new theory of hedging is derived assuming producers are risk neutral forward pricing is costly and borrowing costs are nonlinear the standard risk minimizing hedge ratio is derived when forward pricing is costless when the assumption of costless hedging is dropped high leveraged firms are shown to hedge more than do low leveraged firms if the value of capital is uncorrelated with output price firms are shown to hedge more as cash price variability increases thus the model can be consistent with what firms actually do

narrative and var approaches to monetary policy common identification problems abstract romer and romer romer c d romer d h 1989 does monetary policy matter a new test in the spirit of friedman and schwartz in blanchard o j fischer s eds nber macroeconomics annual 1989 mit press cambridge ma pp 121 170 romer c d romer d h 1994 monetary policy matters journal of monetary economics 34 75 88 adopted a narrative approach to address the identification problems in time series models of monetary policy based on federal reserve documents the romers created a dummy variable equal to one in periods when the federal reserve contracted in response to perceived inflationary pressures this paper shows 1 the dummy variable is predictable from past macroeconomic variables reflecting the endogenous response of policy to the economy 2 unpredictable changes in the dummy do not generate dynamic responses that look like the effects of monetary policy the identification problems that plague time series models also afflict the narrative approach

social choice uncertainty about external costs and trade off between intergenerational environmental impacts the emblematic case of gas based energy supply decentralization abstract the performance of the small natural gas fired power technologies has improved remarkably over the last decade this has aroused the interest of operators regulators and legislators in natural gas fired distributed generation gas fired dg namely the integrated or stand alone use of small modular gas fired power generation close to the point of consumption as an alternative to large power generation and electricity transport over long distances gas fired dg can provide an important benefit from the environmental point of view customer proximity in fact greatly increases the potential for combined heat and power generation involving energy saving and reduced greenhouse gas ghg emissions unfortunately this kind of decentralized supply also determines higher non ghg emissions mainly nox compared to the best available central power technology which occur in urban areas high populated instead of extra urban areas where large power plants are generally located it is therefore difficult to make a reliable evaluation of gas fired dg environmental benefits without comparing centralized and decentralized models in terms of external costs that is without an analysis which allows us to compare the extent of global and local regional impacts in terms of monetary damage if on the one hand this underlines the potential importance of the methods adopted to assess the economic value of environmental externalities even for policy decisions that are binary i e the choice between different energy technologies on the other it raises the crucial question of the uncertainty about the economic estimates this article aims at demonstrating that the uncertainty about external costs even if large does not undermine the possibility of verifying whether gas fired dg is preferable or not to centralized supply the paper compares centralized and decentralized models in terms of the external environmental costs which are calculated by using the results of the available studies in this field in particular the results of the dissemination process of the so called externe project one of the most recent and accurate methodologies and the results of a meta analysis with regard to the marginal cost of ghg emissions the uncertainty about external costs is substantial but not so large that it is not possible to say anything about the environmental raking of alternative technology solutions involving trade off between the impacts of different pollutants or between different kinds of impacts the literature on external costs provides several studies accounting for a large part of uncertainty by means of appropriate statistical and sensitive analysis by using and elaborating these results the analysis described in this paper seems to support the conclusion that centralized supply and especially the completely electric solution based on the reversible electric heat pump is still preferable to natural gas fired chp distributed generation this is not a definitive conclusion but we hope a useful scientific based contribution for policy decisions under the state of the art in fact this result has an interesting policy implication it suggests unless questioning the current enthusiasm on natural gas fired chp distributed generation deployment e g the european commission is indeed advocating dg as a contribution to ghg emission reduction and helps us to reflect upon gas fired dg supporting environmental policies which focus on the reduction of ghg emissions and totally disregard the possible trade off between the impacts of global and local regional pollutants unless one denies the rationality attributed to making tradeoffs on the basis of ethical limits of economic valuations even in this case however cost benefit analysis seems to be legitimate and a necessary step of the public discourse we think that the results of this paper are emblematic from this point of view

testing for weak form efficiency of crude palm oil spot and future markets new evidence from a garch unit root test with multiple structural breaks there is a sizeable literature that tests for weak form efficiency in commodity and energy spot and future prices while many studies now allow for multiple structural breaks to address the criticism that conventional unit root tests have low power to reject the unit root null in the presence of structural change the extant literature overlooks the fact that conventional unit root tests are biased in the presence of conditional heteroscedasticity we apply a recently developed generalized autoregressive conditional heteroscedasticity garch unit root test with multiple structural breaks to crude palm oil spot and future prices and find much more evidence against weak form efficiency than that found using tests that fail to allow for conditional heteroscedasticity our results point to the importance of allowing for heteroscedasticity when testing for efficiency in commodity and energy spot and future prices

the causal direction between money and prices abstract causality is viewed as a matter of control controllability is captured in simon s analysis of causality as an asymmetrical relation of recursion between variables in the unobservable data generating process tests of the stability of marginal and conditional distributions for these variables can provide evidence of causal ordering the causal direction between prices and money in the united states 1950 1985 is assessed the balance of evidence supports the view that money does not cause prices and that prices do cause money

electricity markets volatility estimates regularities and risk management applications the recent deregulation of the market for electric power in many parts of the us and canada has expanded the set of potential tools for managing the types of risks faced by both generators and consumers of electric power in particular manufacturing and other firms whose operations are powered by electricity now face on a continuing basis the engineering management decisions concerning whether they should buy or produce electricity and if they are to buy or sell electricity what types of contracts are optimum these types of risk management decisions typically involve futures forwards options and other financial derivatives the price and volatility of electric power are known to play an essential role in determining which of these instruments should be used however electricity as a commodity possesses certain special features not shared by other commodities and hence its risk properties are not yet well understood in this paper we consider and test certain hypotheses about the properties of electricity price using recent market data we find that electricity prices possess certain volatility and other systematic properties that can be characterized by the type and method of delivery of electricity these properties can be used by firms in formulating their optimal demand and supply schedules of electric power

expected utility debt equity structure and risk balancing the potential effects of agricultural policy on the financial structure of farms is often not fully considered although it has been recognized that policies that reduce business risk may induce farmers to increase financial risk the effects of income policies on farm leverage have not been investigated this paper explores the relationship between farm policy and debt equity structure for a risk averse expected utility maximizer agricultural economists have demonstrated considerable theoretical interest in the futility of agricultural policy many have suggested that policies increasing farm revenues may well result in higher land prices such that landowners receive a windfall gain but incomes of tenant farmers and new entrants are unchanged gabriel and baker added to this nihilism by suggesting that policies that reduce business risk might induce choices that increase financial risk although this important hypothesis is difficult to test gabriel and baker s empirical results appear to be consistent with their hypothesis this paper suggests an alternative to the gabriel and baker model for analysis of the risk balancing hypothesis that is a structural model of the overall debt equity decision for agricultural proprietors structural variables include not only business risk but also expected return from farm operations expected capital gains from land and interest cost the primary assumptions of the model are that a the proprietor s objective is to maximize the expected utility of the rate of return on equity b the utility function of wealth is negative exponential c a normal distribution exists for the rate of return on assets and d taxes are ignored risk concepts and leverage

optimal storage by crop producers when post harvest marketing strategies are restricted by disallowing speculative purchases sales out of storage becomes an irreversible decision and the dynamic marketing problem becomes analogous to the optimal exercise of a financial option the optimal marketing strategy is to hold at low prices and to sell at high prices with a cutoff price function marking the boundary between low and high prices a method for estimating the cut off price function is developed and applied to illinois soybean prices the decision rule is demonstrated to result in substantial gains from storage copyright 2002 oxford university press

style and performance of agricultural market advisory services this article develops measures of marketing style for advisory programs in corn and soybeans and estimates the relationship between style characteristics and pricing performance style is measured by the intensity of futures and options use degree of activeness in marketing and seasonality of sales the data set consists of advisory programs tracked by the agmas project at the university of illinois between 1995 and 2004 results indicate that active programs making large bets on price movements obtain a higher average price than more conservative programs this is consistent with active advisors possessing superior information and or analytical skills rather than being overconfident however estimates of the relationship between pricing performance and activeness are sensitive to the inclusion of a single high performing program

parameter based decision making under estimation risk an application to futures trading this study shows how the standard portfolio model of futures trading should be modified when there is less than perfect information about the relevant parameters estimation risk the standard and the optimal decision rules for futures trading in the presence of estimation risk are compared and discussed an operational model of futures trading for use under estimation risk is advanced in the presence of relevant prior and sample information the model can be used to optimally blend both types of information many of the contributions of economic theory to the study of financial markets involve the use of parameters that are assumed known or estimable by the economic agents examples include the risk premium coefficient 18 and the security market lines that underlie the capital asset pricing model the volatility measures required for option pricing and the minimum variance hedge ratio and expected basis used to construct portfolios of futures contracts and cash positions generally it is left to practitioners to provide estimates of these parameters which are then directly substituted for the actual parameter values of the theoretical model whenever textbooks demonstrate how these parameters can be estimated there is usually a cookbook formula provided that requires some relatively straightforward analysis of the relevant data e g marshall 1989 chapters 6 and 7 cox and rubinstein 1985 chapter 6 the problems with the procedure described above are twofold first the theory has been slow to acknowledge that the practical application of the model almost always involves parameter estimates generally the additional risk of not knowing the true parameters is completely neglected second practitioners or the market participants will often have some type of nonsample information such as insider information or subjective priors that seems relevant for decision making however this potentially important information is ignored altogether when only sample data are used to obtain the parameter estimates

seasonal patterns of futures hedging and the resolution of output uncertainty abstract optimal futures hedging is examined in a two good model with stochastic output and sequential information arrival a producer s optimal hedge depends on demand elasticity sensitivity of his output to weather his correlation with aggregate output and how rapidly his output uncertainty is resolved relative to other producers during different seasonal periods because regional output uncertainties are resolved at different times the optimal futures position of a grower will commonly reverse in direction during the crop year a producer with non stochastic output who faces price risk arising from demand shocks may remain unhedged or even maintain a long position

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

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

pricing and storage of field crops a quarterly model applied to soybeans this paper considers the role of competitive storage in markets for annually harvested field crops a quarterly model is presented that considers the allocative role of storage both within and between crop years rational price expectations are endogenous variables calculated by a recursive method forward stochastic simulations using the model generate data that can be used to characterize the distributions of the variables in the base case the model is assigned parameter values from a quarterly econometric model of the u s soybean market the results shed light on the distributions of the quarterly variables including the rational price expectations and show how these distributions are affected by changes in the carrying charge

the samuelson hypothesis in futures markets an analysis using intraday data this paper considers the samuelson hypothesis which argues that the futures price volatility increases as the futures contract approaches its expiration utilizing intraday data from 20 futures markets in six futures exchanges we find strong support for the samuelson hypothesis in agricultural futures however the samuelson hypothesis does not hold for other futures contracts we also provide supporting evidence that the negative covariance hypothesis is the key factor for the empirical support of the samuelson hypothesis in addition our findings remain largely unaltered even after we control for seasonality and liquidity effects

more reasons why farmers have so little interest in futures markets the use by farmers of futures contracts and other hedging instruments has been observed to be low in many situations and this has sometimes seemed to be considered surprising or even mysterious we propose that it is in fact readily understandable and consistent with rational decision making standard models of the decision about optimal hedging show that it is negatively related to basis risk to quantity risk and to transaction costs farmers who have less uncertainty about prices and those with a diversified portfolio of investments have lower optimal levels of hedging if a farmer has optimistic price expectations relative to the futures market the incentive to hedge can be greatly reduced and finally farmers who have low levels of risk aversion have little to gain from hedging in terms of risk reduction in that the certainty equivalent payoff at their optimal hedge may be little different than the certainty equivalent under zero hedging these reasons are additional to the argument of simmons 2002 who showed that if capital markets are efficient farmers can manage their risk exposure through adjusting their leverage obviating the need for hedging instruments

optimal hedging with a subjective view an empirical bayesian approach the standard optimal hedging model has been the preferred theoretical model of normative hedging behavior in empirical applications the model is often implemented with the parameter certainty equivalent pce procedure however the pce procedure completely ignores parameter estimation risk and subjective views we develop an empirical bayesian optimal hedging model that not only effectively accommodates parameter estimation risk but also provides hedgers with a theoretically intuitive yet quantitatively rigorous framework to blend their subjective views and a marketwide or firmwide consensus in determining optimal hedging positions ratios

money may matter but how could you know abstract christina and david romers reply to our article post hoc ergo propter hoc once more misses the point our argument was never that monetary policy did not matter but that their methods could not provide useful evidence that it did yet they offer additional evidence of the same type with respect to the efficacy of monetary shocks without effectively replying to the criticisms of their methods we show point by point that such responses as they give leave our original conclusion intact their narrative statistical approach is a complicated version of the fallacy post hoc ergo propter hoc and as such will not sustain inferences with respect to the direction and strength of the causes of output fluctuations

exogenous oil supply shocks how big are they and how much do they matter for the u s economy abstract the paper proposes a new measure of exogenous oil supply shocks the timing the magnitude and the sign of this measure may differ greatly from current state of the art estimates it is shown that only a small fraction of the observed oil price increases during oil crisis periods can be attributed to exogenous oil production disruptions exogenous oil supply shocks cause a sharp drop of u s real gdp growth after five quarters rather than an immediate and sustained reduction in economic growth and a spike in cpi inflation after three quarters overall exogenous oil supply shocks made remarkably little difference for the evolution of the u s economy since the 1970s although they did matter for some historical episodes

multivariate forecasting of a commodity portfolio application to cattle feeding margins and risk traditionally economists have utilized univariate approaches to forecast prices even for firms operating in multicommodity environments this research improves the way in which managerial decision making is analysed by developing a model better representing the price risks and opportunities faced by firms that produce using a portfolio of commodities using the situation of cattle feedlot investors and managers as an example this is accomplished by recognizing the multivariate live cattle feeder cattle and corn prices situation that feedlots operate in and employing corresponding multivariate simulation techniques evaluation suggests that properly modelling the cattle feeding margin as a multivariate set of prices significantly improves the accuracy of forecasting future feeding margin values realized in the cash market the model also suggests incorporating both implied and historical time varying volatility information when forecasting margin variability implications for other multicommodity sit

assessing the information content of mark to market accounting with mixed attributes the case of cash flow hedges we examine how outsiders rationally interpret a reported loss on derivatives when the application of mark to market accounting to cash flow hedges creates a mixed attribute problem we find that because of the mixed attribute problem the information content of mark to market accounting is related to the information content of historical cost accounting in a very specific way this relationship allows us to identify the circumstances under which mark to market accounting facilitates and when it detracts from the objective of providing an early warning of potential financial distress we show that the reporting of an impending derivative loss by a distressed firm can actually lead outsiders to infer that the firm is in a better financial position than what they would have inferred under the silence associated with historical cost accounting without the mixed attribute problem mark to market accounting would always yield more accurate assessments of the firm s financial position

futures hedging under price basis and production risk we consider the hedging problem of a firm that has three sources of risk price basis and yield uncertainty an exact solution for the optimal futures hedge is derived under the assumption that the three random variables are jointly normally distributed and that utility is of the cara type unlike the mean variance approximation applied in previous research we show that the optimal hedge does depend on risk attitudes even when the agent perceives the futures price as being unbiased the theoretical results are applied empirically to the problem of hedging soybean production in iowa the exact solution relying on cara and normality is compared with numerical solutions under lognormal distributions and crra utility

volatility in electricity derivative markets the samuelson effect revisited this article proposes an empirical study of the samuelson effect in electricity markets our motivations are twofold first although the literature largely assesses the decreasing pattern in the volatilities along the price curve in commodity markets it has not extensively tested the presence of such a dynamic feature in electricity prices second the analysis of a non storable commodity enriches the literature on the behavior of commodity prices indeed it has been sometimes asserted that the samuelson effect results from the presence of inventories we examine the four most important electricity futures markets worldwide for the period from 2008 to 2014 the german nordic australian and us markets we also use the american crude oil market as a benchmark for a storable commodity negotiated on a mature futures market our analysis has two steps i in addition to the traditional tests we propose and test a new empirical implication of the samuelson effect price shocks should spread from the physical market to the paper market and not the reverse ii based on the concept of indirect storability we investigate the link between the samuelson effect and the storability of the commodity we find evidence of a samuelson effect in all of the electricity markets and show that storage is not a necessary condition for such an effect to appear these results should be taken into account for the understanding of the dynamic behavior of commodity prices for the valuation of electricity assets and for hedging operations

the empirical minimum variance hedge decision making under unknown true parameters estimation risk is discussed along with bayes and parameter certainty equivalent pce criteria bayes criterion incorporates estimation risk in a manner consistent with expected utility maximization the pce method which is the most commonly used is not consistent with expected utility maximization bayes criterion is employed to solve for the minimum variance hedge ratio empirical application of bayes minimum variance hedge ratio is addressed and illustrated simulations shoe that discrepancies between prior and sample parameters may lead to substantial differences between bayesian and pce minimum variance hedges

non cooperative public good provision and productivity differentials we explore the generality of a rotten spouse theorem in konrad and lommerud 1995 while the result holds for an arbitrary number of agents it fails to hold for general technologies some of the implications for models of co emissions are discussed

optimal hedging in a dynamic futures market with a nonnegativity constraint on wealth abstract this paper examines the issue of optimal hedging demands for futures contracts from an investor who cannot freely trade his portfolio of primitive assets in the context of lognormal rather than normal returns and of a constant absolute risk aversion utility function in this context the nonnegativity constraint on wealth is binding and the optimal hedging demands are not identical with those encountered in the bulk of the literature which has largely overlooked this problem negative results concerning the derivation of equilibrium in the futures markets and the computation of the open interests then follow

portfolio theory and the demand for futures the case of california cotton this paper examines the simultaneous choice of cropping patterns and futures positions it derives the demand for hedging as a function of the price of a hedge and the crop choice set it estimates these functions for california cotton farmers it finds that both the costs of hedging and the opportunity to diversify risk by growing other crops substantially change the optimal hedge for california cotton farmers

economic behavior under uncertainty a joint analysis of risk preferences and technology a method is developed to estimate jointly risk preferences and technology under general conditions the approach is illustrated in an application to the analysis of u s corn soybean acreage decisions over time the results provide useful information on the nature of farmers risk preferences and on the influence of price risk and production risk on acreage allocation and farmers welfare copyright 1996 by mit press

revisiting the determinants of futures contracts success the role of market participants the chicago mercantile exchange introduced a futures contract for distillers dried grains ddgs in early 2010 but the market became inactive only four months after its inception while many new futures contracts do not develop into high volume traders interest from ddg cash market participants indicated that this contract could be successful prompted by the unexpected lack of trading activity in this new futures market we empirically revisit the question of what factors contribute to a futures contract s success and extend the literature by investigating the roles of market participants and the significance of supporting futures markets estimation results indicate that the market participant type hedger or speculator affects futures contract trade volume more importantly we find that the viability of new futures contracts for commodities that are jointly produced with other commodities is impacted by hedgers trade volume of the related futures contract these results provide important additions into the portfolio of indicators used by commodity exchanges to more cost effectively evaluate new futures contract products

expiration and maturity effect empirical evidence from the spanish spot and futures stock index the paper studies how the time remaining to the expiration date of derivative markets affects the volatility of the ibex 35 index expiration effect and its futures market maturity effect the innovation of the study lies in both effects being studied together for the spanish stock market using bivariate ecm garch including dummy variables that express the time left to expiration day the results obtained show that during the week of the expiration day the conditional variance of both markets increases without presenting any significant behaviour in the correlation level during the second week however the conditional variance diminishes and the degree of correlation between both markets increases

pricing weather insurance with a random strike price the ontario ice wine harvest weather insurance within the agricultural sector has been limited by the difficulty in defining the appropriate weather event and in pricing the product we develop a new pricing method for weather insurance under situations where returns depend not only on the occurrence of the weather event but also its timing the method is used to price weather insurance for ice wine because the harvest quantity of grapes for ice wine degrades over time the strike value on the weather event measured as harvestable hours is random we develop a monte carlo method to estimate the premium

the importance of financial leverage and risk aversion in risk management strategy selection the problem of choice among risk management strategies is addressed with the stochastic dominance with a risk free asset sdra criteria the sdra criteria consider all possible combinations of the strategies and financial leverage this allows for strategies with less business risk less expected return and greater leverage to dominate strategies with greater business risk and greater expected return results show that the inclusion of the risk free asset significantly improves the discriminatory power of the ordinary stochastic dominance criteria for the case of risk management strategies copyright 2002 oxford university press

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

a simple multiperiod minimum risk hedge model a multiperiod hedging model is developed that is simpler than other multiperiod models in the literature the model permits periodic adjustment of the hedge while minimizing the producer s profit variance minimum risk hedge ratios are calculated for steers cows hogs corn and soybeans using the full model with hedge adjustments every two months these ratios are compared to those using the model without periodic hedge adjustments and to a simple single period model the results suggest that simple models may work well for simple hedges while the full model is best for more complex hedging situations such as cross hedges our purpose in this paper is to develop a multiperiod hedging model in which the hedge can be updated each period other multiperiod hedging models e g anderson and danthine karp have substantial data requirements which limit their use as viable hedging tools our aim is to develop a simpler model that will have practical application the model is used to calculate minimum risk hedge ratios for steers cows hogs corn and soybeans and these ratios are compared with hedge ratios based on a multiperiod model in which the hedge cannot be adjusted each period simple minimum risk hedge ratios also are computed for each commodity and compared with the other ratios

investment and hedging under a stochastic yield curve abstract this paper examines portfolio decisions involving both fixed and non fixed income securities two state variables the short term and the long term interest rates fully determine the bonds prices and partly influence the other assets prices we propose first a methodology for determining optimal portfolios in such a context and then use that methodology to solve the portfolio problem of investors whose long term bond holdings are constrained which generates undesirable interest rate risk that are hedged with futures contracts the individual futures positions which involve several hedging components and the futures market equilibrium open interest are derived and analysed

production flexibility stochastic separation hedging and futures prices we study a dynamic model where uncertainty about interim output adjustments causes producers to face price cost and output uncertainty stochastically separable production decisions are independent of the producer s risk preferences and expectations and are based on the prevailing futures price as a certain output price conditions under which futures contracts achieve stochastic separation are established optimal hedging and maturity structure of futures contracts equilibrium futures prices and the effects of futures trading on output are studied the systematic risk premium depends on the product of the futures beta and the covariance of the market return with production revenues article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

oil shocks and aggregate macroeconomic behavior the role of monetary policy a recent paper by bernanke gertler and watson 1997 suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock this paper challenges this conclusion on two grounds first we question whether the federal reserve actually has the power to implement such a policy for example we consider it unlikely that additional money creation would have succeeded in reducing the fed funds rate by 900 basis points relative to the values seen in 1974 second we point out that the size of the effect that bernanke gertler and watson attribute to oil shocks is substantially smaller than that reported by other researchers primarily due to their choice of a shorter lag length than that used by other researchers we offer evidence in favor of the longer lag length employed by previous research and show that under this specification even the aggressive federal reserve policies proposed would not have succeeded in averting a downturn