Causality and Efficiency in the Coffee Futures Market

Kebede, Yohannes (1992): Causality and Efficiency in the Coffee Futures Market. Published in: Journal of International Food & Agribusiness Marketing , Vol. 5, No. 1 (1993): pp. 55-71.

Abstract

Tests for causality and rationality in the coffee futures market were carried out using data from the New York Market. Tests of causality indicated that futures prices strongly influence variations in spot price eight weeks or more to maturity. However, beginning seven weeks to maturity there seems to be a strong causal relationship going from futures to spot and from spot to futures. Risk constancy or neutrality, equality of risk premium and spot price, and efficiency were rejected for the period 18, 51, and 33 weeks or more to maturity. However, simultaneity of risk neutrality and efficiency was accepted for contracts with 55-77 weeks to maturity. The general conclusion from this study is that coffee futures market can be used as an indicator of spot market prices for contracts with 55-77 weeks to maturity. While benefits can be obtained through short term adjustment of available stock and making use of quality storage facilities, planning longer term planting and marketing decisions (e.g., ≥ 77 weeks) on the basis of futures market price can result in misallocation of resources and welfare loss.

• Item Type: MPRA Paper
• Language: English
• Keywords: Causality; Granger-causality; coffee; futures market; spot market; risk premium; efficiency; resource allocation; welfare
• Subjects: O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa; L - Industrial Organization > L7 - Industry Studies: Primary Products and Construction > L79 - Other; F - International Economics > F0 - General > F01 - Global Outlook; O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; C - Mathematical and Quantitative Methods > C4 - Econometric and Statistical Methods: Special Topics > C44 - Statistical Decision Theory; Operations Research; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C51 - Model Construction and Estimation; O - Economic Development, Technological Change, and Growth > O2 - Development Planning and Policy > O21 - Planning Models; Planning Policy; O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O19 - International Linkages to Development; Role of International Organizations; Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q1 - Agriculture > Q13 - Agricultural Markets and Marketing; Cooperatives; Agribusiness; M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising > M31 - Marketing; D - Microeconomics > D4 - Market Structure and Pricing > D41 - Perfect Competition; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L11 - Production, Pricing, and Market Structure; Size Distribution of Firms; O - Economic Development, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy; Factor Movement Policy; Foreign Exchange Policy; Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics > Q1 - Agriculture > Q17 - Agriculture in International Trade; C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models; Dynamic Quantile Regressions ; F - International Economics > F1 - Trade > F14 - Country and Industry Studies of Trade; D - Microeconomics > D4 - Market Structure and Pricing > D40 - General; F - International Economics > F1 - Trade > F13 - Commercial Policy; Protection; Promotion; Trade Negotiations; International Trade Organizations; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O13 - Agriculture; Natural Resources; Energy; Environment; Other Primary Products; L - Industrial Organization > L7 - Industry Studies: Primary Products and Construction > L78 - Government Policy

References

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