Futures markets and real estate public equity: Connectivity of lumber futures and Timber REITs

This paper investigates connectivity between lumber futures contracts, Timberland REITs, the FTSE NAREIT U.S. REIT index, spot prices, and timberland capitalization rates, and contributes to this tranche of research by empirically linking the price discovery process of Timberland Real Estate Investment Trusts to lumber futures. We employ VEC and GARCH models, providing evidence that lumber futures have a positive significant long- and short-run equilibrium relationship with publicly traded Timber REIT prices, connecting a specific futures commodity with its theoretically entwined real estate equity index. As such, exogenous factors that influence Timber REIT prices are documented leading to possible diversification/risk reduction strategies.     

Futures markets and price stabilisation: An analysis of soybeans markets in North America

The objective of this paper was to determine whether the futures markets have a stabilising or destabilising impact on soybean's spot prices in North America. Directed acyclic graphs (DAGs) are used to test for causality between futures prices, spot prices and ending stocks, followed by time series econometric analysis. The DAGs point to the two-way causal link between futures and spot prices and a lack of a causal link between inventory/stocks and spot price volatility. Time series results, including cointegration, vector error correction, impulse response and variance decomposition analysis, indicate a large impact from futures markets on the level and volatility of soybean spot prices in both the short and long run. These results have potentially important implications, as the impact of commodity price volatility is typically asymmetric across different actors. Farmers, for example, unlike speculators, utilise price risk management (PRM) instruments such as futures markets to mitigate price risks and appear to suffer from intensified volatility precisely because of their use of these instruments. Therefore, additional policies to cope with commodity price volatility, such as direct price controls or mitigation of consequences, can have critical stabilising functions supporting farmers' welfare and regional (rural) development.     

Futures Markets and Spot Price Volatility: A Case Study

Futures markets, where they exist, can play a crucial role in determining the storage decision in the underlying spot (physical) market. The futures market acts as a conduit for market information and is a gatherer of agents' expectations about the future prospects for the spot market. As such, it is able to provide both price insurance and price discovery roles, the latter of which generates information for spot market traders and allows them to make rational storage decisions. If this were to be the case, then the efficiency of storage is improved which can potentially lead to a reduction in the volatility of spot prices over the marketing season. The existing literature is ambiguous as to whether futures markets can help spot markets price more efficiently. This paper seeks to examine whether this is the case in the British maincrop potato market by evaluating the volatility of spot prices over the period 1969–96 in a “before-after” analysis of the impact of the introduction of futures trading in 1980. The results suggest that the introduction of the futures market has led to a reduction in price volatility, despite some problems in the operation of the futures market itself.     

Did Futures Markets Stabilise US Grain Prices?

Though economists are divided over whether, in practice, futures markets reduce spot price volatility, observers of nascent nineteenth century US futures markets essentially praised the stabilising effects of this financial innovation. Indeed, such praise is understandable, particularly if, as the Chicago Board of Trade (CBOT) and others assert, “violent” spot price fluctuations were common prior to, but not after, the 1870s; the same decade that grain trade historians typically associate with the birth of the modern futures contract. And whereas these events may be unrelated, the claim is intriguing because it requires that nineteenth century futures prices fulfil their price discovery function, a property that many modern futures markets do not possess. This paper explores what role, if any, the advent of futures trading may have had on spot price volatility. I corroborate the CBOT's assertion regarding diminished spot price volatility around the 1870s and show that early futures prices did indeed fulfil their price discovery function. Moreover, I address two alternative hypotheses that relate the decline in spot price volatility to the Civil War. Ultimately, I maintain that the evolution of futures markets is the principal proximate reason why commodity spot price volatility diminished.     

Out‐of‐sample testing price discovery in commodity markets: the case of soybeans

Price discovery, a central function of futures markets, has been usually tested in‐sample by studying the common stochastic trend between spot and futures prices. Instead, to evaluate futures as anticipatory prices, we develop a forecast approach to out‐of‐sample test price discovery in a multivariate framework. We apply it to the soybeans market. Results indicate futures prices as the best available “predictors” of future spot prices, although this finding holds only on average and for certain periods, other models show forecasting gains.     

Developing Hedging Strategies for Québec Hog Producers under Revenue Insurance

The paper investigates the optimal hedging strategies of Québec hog producers when they participate in a publicly funded revenue insurance program known as ASRA (Régime d'assurance-stabilisation des revenus agricoles). A forecast model of local cash and futures prices is built and Monte Carlo methods are used to derive the optimal futures and option positions of Québec hog producers. The positive correlation between forecasts of futures and cash spot prices induces positive sales of futures and put options to hedge price risk. ASRA provides put options to hog producers at actuarially advantageous terms. Producers can increase the expected utility of profits by selling back a portion of these put options using financial markets. Options are attractive to manage price risk given the nonlinearity in the profit function induced by the revenue insurance scheme. Speculative incentives to use futures and options are also discussed in the context of ASRA.     

利用CEM木材期货规避针叶材进口价格风险的可行性分析——基于月度统计数据的实证分析

CEM木材期货以产自北美的SPF锯材为合同标的物。过去一直认为CEM木材期货价格对中国的木材价格不产生影响,但是协整分析表明,滞后3个月的CEM木材期货价格与2012年5月以来的针叶原木进口价格之间存在长期均衡关系,说明CEM木材期货价格是针叶原木进口价格的格兰杰原因。考虑到进口针叶原木价格与中国木材市场价格综合指数高度相关,木材进口企业利用CEM木材期货规避针叶材进口中的价格风险是可行的。     

Destabilizing role of futures markets on North American hard red spring wheat spot prices

The objective of the paper is to determine if the futures prices of hard red spring wheat (HRSW) have stabilizing or destabilizing impact on spot HRSW price in North America. Several important results emerge from thorough empirical analysis. First, both Granger causality tests and directed acyclic graph algorithms (DAGs) point to two-way causality between futures and spot HRSW prices and thus endogeneity in both prices formation. To the contrary, both procedures suggest that ending stocks are exogenous to spot and futures HRSW prices. Both vector error correction model and impulse response functions point to a large and long-lasting impact of a shock to futures price on spot price level. Finally, variance decomposition analysis indicates that futures prices are responsible for the bulk of spot price volatility in both short and long run. Our result is consistent with those of theoretical models suggesting that when production (supply side) is the dominant disturbance, spot price is destabilized in both the short and the long run by futures prices. An important implication of this research is the need for alternative market mechanisms or alternative farm policy measures that would mitigate price risk and ensure sustainable farming of American HRSW farmers.     

价格支持、政策调整及粮食市场波动

目的 为了估计价格支持政策对不同粮食品种期现货价格波动的直接影响,实证分析和比较了政策及其调整对粮食期现货价格波动实施效果的影响,为深化粮食价格形成机制改革提供一定的理论参考和实证支撑。方法 文章利用稻谷、小麦、玉米和大豆的现货与期货价格日数据,将政策以虚拟变量的形式引入GARCH模型实证分析最低收购价政策、临时收储政策及其调整对平抑粮食期现货市场波动的作用。结果 价格支持政策对粮食价格波动产生了显著影响,最低收购价政策能够明显降低稻谷和小麦现货市场的波动程度,但对期货市场波动的作用则相反;玉米和大豆临时收储政策的取消导致现货市场波动性提高,而对期货市场波动的影响存在差异。结论 价格支持政策具有降低价格波动的作用效果,政策调控效果与实施品种的国内供求及市场形势、国内外市场的联系程度密切相关,政策的完善还需关注对期货市场波动的影响。     

SPECTRAL ANALYSIS OF THE THEORY OF ANTICIPATORY PRICES

The paper investigates the intertemporal relationship between cash and futures price changes using the techniques of spectral analysis. Daily data for the wheat, corn and soybean markets are analysed to determine if and how cash and futures prices move together. On a daily basis wheat and corn cash and futures prices move together; soybeans cash and futures prices do not move together on a daily basis.     

Is a Futures Market Viable in Turkey? The Case of a Cotton Futures Market

Abstract

Many countries as they reduce price controls develop an interest in futures markets as a way to manage risk. This article explores the potential of using existing futures markets to hedge cotton in Turkey. Futures prices in New York and Liverpool are not cointegrated and only weakly correlated with cash prices in Izmir. Thus, existing futures markets have limited ability to reduce the risk faced by the cotton industry in Turkey. While there are obstacles to overcome, there does appear to be a potential demand for a cotton futures market in Turkey.     

Could packers manipulate spot markets by tying contracts to futures prices? And do they?

Some producers, policy makers, and researchers claim that packers influence cash prices through contracts tied to futures prices. This paper provides a theoretical and empirical study on the price effects of contract-pricing terms linked to futures price and the related formula pricing terms linked to a cash price. We show that contract-pricing terms tied to a cattle futures price can theoretically be used to reduce the cash price. Furthermore, the model demonstrates that such tied-to-a-futures-price contract-pricing clauses and the related tied-to-a-cash-price formula pricing clauses can be substitutable tools for packers to depress the cash cattle price. Nevertheless, although empirical results are consistent with the predictions of the theoretical model they show that while such manipulations may occur, their market power impact appears quite small.     

Agricultural price transmission across space and commodities during price bubbles

This article investigates agricultural price transmission during price bubbles. The empirical approach concerns the horizontal transmission of cereal prices both across different market places and across different commodities. The trade policy intervention put forward to mitigate the impact of price exuberance is considered. The analysis is performed using Italian and international weekly spot (cash) price data over years 2006–2010, a period of generalized turbulence of agricultural markets. Firstly, the properties of price time series are explored; then, interdependence across prices is specified and estimated by adopting appropriate cointegration techniques. Results suggest that the bubble had only a slight impact on the price spread and the temporary trade‐policy measure, when effective, has limited this impact.     

How Reliable Are Hog Futures as Forecasts?

The Chicago Mercantile Exchange hog futures contract was revamped in 1997 and it is one of the largest futures markets for a nonstorable commodity. The literature is divided on whether or not futures prices for nonstorables provide reliable forecasts of cash prices. We find that from 1998 to 2004, the hog futures market was an unbiased predictor of cash prices.     

中国农产品期货市场功能发挥的现货市场条件探讨

本文在对期货市场功能发挥和现货市场关系探讨的基础上，从期货市场发现价格和回避风险功能角度，指出农产品期货市场功能发挥所需具备的现货市场条件是：现货市场发达完善和接近完全竞争；进而实证分析影响中国农产品期货市场功能发挥的现货市场条件的因素。主要结论是中国农产品期货市场是在现货市场发育还不充分的情况下产生并发展起来的，不完善的现货市场争件是影响和制约农产品期货市场功能充分发挥的关键因素。     

Efficiency tests of agricultural commodity futures markets in China

The efficiency of the Chinese wheat and soybean futures markets is studied. Formal statistical tests were conducted based on Johansen's cointegration approach for three different cash markets and six different futures forecasting horizons ranging from 1 week to 4 months. The results suggest a long-term equilibrium relationship between the futures price and cash price for soybeans and weak short-term efficiency in the soybean futures market. The futures market for wheat is inefficient, which may be caused by over-speculation and government intervention.     

ASPECTS OF HEDGING THEORY

In this paper, interpretative comments are offered on some established aspects of the economics of futures trading, including the nature of the equilibrium condition in the case of an inverse carrying charge, some inferences about traders' market positions made from estimates of returns, and the implications of the normal backwardation hypothesis in cases where hedgers are net long. The paper also includes a survey of the recent literature on the forward pricing function of futures markets, with a discussion of, inter alia, the methods used to investigate the hypothesis that futures prices are anticipations of delivery date spot prices, and the possible reasons why some markets perform this function better than others.     

Measuring the functional efficiency of agricultural futures markets

This article presents a method for measuring the functional efficiency of agricultural futures markets in terms of social welfare using a standard futures market structural model. Employing the concept of social surplus, it can be shown that, when futures prices are used to estimate future spot prices, the errors in prediction produce to some degree resource misallocation, which in turn results in welfare losses. Therefore, the social welfare associated with the presence of futures markets can be measured using a Social Loss index. The indicator was calculated for the period 1975–2015 and for several subperiods, which allow us to analyse functional efficiency before and after the 2007–2008 spikes in the prices of agricultural commodities. Futures contracts for 12 products are evaluated. The products are grouped in three different categories: ‘soft products’, ‘livestock’ and ‘grains and oilseeds’. The results indicate that livestock contracts tended to be more efficient than the rest of the contracts during the whole period, but in 2008–2015 their efficiency decreased vis‐á‐vis the rest of the products. Nevertheless, 2008–2015 proved to be the most efficient subperiod, confirming the remarkable development of agricultural futures markets over time.     

How much of commodity price behavior can a rational expectations storage model explain?

A rational expectations competitive storage model was applied to the U.S. corn market, to assess the aptness of this framework in explaining monthly price behavior in an actual commodity market. Relative to previous models, extensive realism was added to the model, in terms of how production activities and storage costs are specified. By modeling convenience yield, “backwardation” in prices between crop years did not depend on the unrealistic assumption of zero ending stocks. Our model generated cash prices that were distributed with positive skewness and kurtosis, and mean and variance that increased over the storage season, comparable to the persistence and the occasional spikes observed in commodity prices. Futures prices were generated as conditional expectations of cash prices at contract maturity, and the variances of futures prices exhibited realistic time–to‐maturity and seasonal patterns. Model realizations of cash and futures prices over many “years” were used to demonstrate the wide variety of price behaviors that could be observed in an efficient market with a similar market structure, implying that economic and policy implications drawn from short, historical samples of prices could be misleading.     

Bubbles,Froth and Facts: Another Look at the Masters Hypothesis in Commodity Futures Markets

The Masters Hypothesis suggests that long‐only index funds were the main cause of a massive increase in commodity prices in 2007–2008 and 2011–2012. Central to the Masters Hypothesis are three basic tenets: (i) long‐only commodity index funds were directly responsible for driving futures prices higher; (ii) the deviations from fundamental value were economically very large; (iii) the impact was pervasive across commodity futures markets. There has been a great deal of empirical research on the Masters Hypothesis and commodity market bubbles. However, surprisingly few studies have found evidence that directly support the main tenets of the Masters Hypothesis. Some have attributed the lack of supporting evidence to the low‐power of time‐series tests, market efficiency issues and a lack of conditioning variables within models. In this paper, we address each of these issues using updated data and new empirical approaches. Still, price behaviour consistent with the Masters Hypothesis is surprisingly difficult to find in the data. This is an important finding given the on‐going policy debate and regulations proposed or being implemented to limit speculative positions in these markets.