SABIIA - Sistema Aberto e Integrado de Informação em Agricultura (Sabiia)

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using a simple derivative with a linear payoff function (a futures contract). For various methods of parameter estimation and inference, we find that the partial equilibrium models cannot out-perform the time series model. The partial equilibrium models unpalatable assumptions of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term...

COMPARING THE PERFORMANCES OF THE PARTIAL EQUILIBRIUM AND TIME-SERIES APPROACHES TO HEDGING

Palavras-chave: Marketing.

Ano: 2003

URL: http://purl.umn.edu/18972

This research compares partial equilibrium and statistical time-series approaches to hedging. The finance literature stresses the former approach, while the applied economics literature has focused on the latter. We compare the out-of-sample hedging effectiveness of the two approaches when hedging commodity price risk using futures contracts. For various methods of parameter estimation and inference, we find that the partial equilibrium models cannot out-perform a vector error-correction model with a GARCH error structure. The partial equilibrium models' unpalatable assumption of deterministically evolving futures volatility seems to impede their hedging effectiveness, even when potentially foresighted option-implied volatility term structures are...

CAUSALITY IN FUTURES MARKETS

Palavras-chave: Marketing; Risk and Uncertainty.

Ano: 2003

URL: http://purl.umn.edu/28580

Bryant, Henry L.; Bessler, David A.; Haigh, Michael S..

This research investigates various unresolved issues regarding futures markets, using formal methods appropriate for inferring causal relationships from observational data when some relevant quantities are hidden. We find no evidence supporting the generalized version of Keynes's theory of normal backwardation. We find no evidence supporting theories that predict that the level of activity of speculators or uninformed traders affects the level of price volatility, either positively or negatively. Our evidence strongly supports the mixture of distribution hypothesis (MDH) that trading volume and price volatility have one or more latent common causes, resulting in their positive correlation.

Estimating Actual Bid-Ask Spreads in Commodity Futures Markets

Palavras-chave: Marketing.

Ano: 2003

URL: http://purl.umn.edu/28574

Various bid-ask spread estimators are applied to transaction data from LIFFE cocoa and coffee futures markets, and the resulting estimates are compared to observed actual bid-ask spreads. Results suggest that actual bid-ask spreads, which are not reported by most open-outcry futures markets, can be reasonably estimated using readily available transaction data. This is especially important since recent research seems to indicate that efforts to estimate effective spreads using data commonly available from futures markets have not been successful. Thus estimates of actual spreads can give market participants and researchers some idea of potential transaction costs. Accurate estimates of bid-ask spreads will also be needed to assess the relative efficiency...

HEDGING FOREIGN CURRENCY, FREIGHT AND COMMODITY FUTURES PORTFOLIOS: A NOTE

Palavras-chave: Marketing.

Ano: 2001

URL: http://purl.umn.edu/18958

Foreign exchange hedging ratios are simultaneously estimated alongside freight and commodity ratios in a time-varying portfolio framework. Foreign exchange futures are found to be by far the most important derivative instrument to be employed in order to reduce uncertainty for traders. Our results lend support to the decision by LIFFE to cease trading the BIFFEX freight futures contract because of its low levels of trading activity, which likely resulted from its apparent unattractiveness as a hedging instrument.

INFORMATION CASCADES WITH FINANCIAL MARKET PROFESSIONALS: AN EXPERIMENTAL STUDY

Palavras-chave: Marketing.

Ano: 2002

URL: http://purl.umn.edu/28573

Alevy, Jonathan E.; Haigh, Michael S.; List, John A..

In settings where there is imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, information cascades can lead to rational herding. Cascade phenomena may be seen in a variety of areas including technology adoption, financial market behavior, as well as in social processes such as mate selection or fads and fashions. Theories of rational herding have found a natural testing ground in experimental environments since the character of private and public information can be readily controlled. In previous experimental studies, behavior consistent with Bayesian benchmarks has been observed in simple contexts, but there are substantial reductions in experimental environments that...

CAUSALITY AND PRICE DISCOVERY: AN APPLICATION OF DIRECTED ACYCLIC GRAPHS

Palavras-chave: Marketing.

Ano: 2003

URL: http://purl.umn.edu/18976

Haigh, Michael S.; Bessler, David A..

Directed Acyclic Graphs (DAG's) and Error Correction Models (ECM's) are employed to analyze questions of price discovery between spatially separated commodity markets and the transportation market linking them together. Results from our analysis suggest that these markets are highly interconnected but that it is the inland commodity market that is strongly influenced by both the transportation and commodity export markets in contemporaneous time. However, the commodity markets affect the volatility of the transportation market over longer horizons. Our results suggest that transportation rates are critical in the price discovery process lending support for the recent development of exchange traded barge rate futures contracts.

The Role of the Bid-Ask Spread in a Dynamic - Time-Varying Optimal Hedging Model

Palavras-chave: Demand and Price Analysis.

Ano: 2002

URL: http://purl.umn.edu/19057

Haigh, Michael S..

This paper presents a manageable and effective way of nesting two popular, yet distinct approaches to obtain optimal hedging ratios - time-series econometrics (GARCH) and dynamic programming (DP). The nested DP-GARCH model is then compared to a DP-GARCH model that accounts for variability in the bid-ask spread often unobserved (and hence ignored) in most studies. Results from an empirical application using data from an importantly traded commodity " sugar " suggest that a DP-GARCH model that incorporates the bid-ask spread still outperforms more traditional models. Moreover, the hedging ratios are far less volatile, and statistically different, than those recommended by the traditional GARCH methods that ignore the spread.

VOLATILITY SPILLOVERS BETWEEN FOREIGN EXCHANGE, COMMODITY AND FREIGHT FUTURES PRICES: IMPLICATIONS FOR HEDGING STRATEGIES

Palavras-chave: Marketing.

Ano: 2001

URL: http://purl.umn.edu/18967

In many studies the assumption is made that traders only encounter one type of price risk. In reality, however, traders are exposed to multiple price risks, and often have several relevant derivative instruments available with which to hedge price uncertainty. In this study, commodity, foreign exchange, and freight futures contracts are analyzed for their effectiveness in reducing price uncertainty for international grain traders. A theoretical model is developed for a representative European importer to depict a realistic trading problem encountered by an international grain trading corporation exposed to more than one type of price risk. The traditional method of estimating hedge ratios by Ordinary Least Squares (OLS) is compared to the Seemingly...

Disproving Causal Relationships Using Observational Data

Palavras-chave: Hedging; Multivariate GARCH; Foreign exchange; Freight and commodity futures; Marketing; F3; C3; G1.

Ano: 1999

URL: http://purl.umn.edu/23997

Bryant, Henry L.; Bessler, David A.; Haigh, Michael S..

Economic theory is replete with causal hypotheses that are scarcely tested because economists are generally constrained to work with observational data. This article describes the use of causal inference methods for testing a hypothesis that one random variable causes another. Contingent on a sufficiently strong correspondence between the hypothesized cause and effect, an appropriately related third variable can be employed for such a test. The procedure is intuitive, and is easy to implement. The basic logic of the procedure naturally suggests strong and weak grounds for rejecting the hypothesized causal relationship. Monte Carlo results suggest that weakly-grounded rejections are unreliable for small samples, but reasonably reliable for large...

BID-ASK SPREADS IN COMMODITY FUTURES MARKETS

Palavras-chave: Research Methods/ Statistical Methods.

Ano: 2006

URL: http://purl.umn.edu/21166

Issues of recent interest and controversy regarding bid-ask spreads in commodity futures markets are investigated. First we apply competing spread estimators to open outcry transactions data and compare resulting estimates to observed spreads. This enables market microstructure researchers, regulators, exchange officials, and traders the opportunity to evaluate the usefulness and accuracy of bid-ask estimators in markets that do not report bid and ask data, providing an idea of the "worst-case" transaction costs that are likely to be incurred. We also compare spreads observed before and after trading was automated (and made anonymous) on commodity futures markets, and discover that spreads have generally widened since trading was automated, and that they...

CAUSALITY AND PRICE DISCOVERY: AN APPLICATION OF DIRECTED ACYCLIC GRAPHS

Palavras-chave: Marketing.

Ano: 2002

URL: http://purl.umn.edu/28587

Haigh, Michael S.; Bessler, David A..

Directed Acyclic Graphs (DAG's) and Error Correction Models (ECM's) are employed to analyze questions of price discovery between spatially separated commodity markets and the transportation market linking them together. Results from our analysis suggest these markets are highly interconnected but it is the inland commodity market that is strongly influenced by both the transportation and commodity export markets. However, the commodity markets affect the volatility of the transportation market over longer horizons. Our results suggest that transportation rates are critical in the price discovery process lending support for the recent development of exchange traded barge rate futures contracts.

PRICE AND PRICE RISK DYNAMICS IN BARGE AND OCEAN FREIGHT MARKETS AND THE EFFECTS ON COMMODITY TRADING

Palavras-chave: Demand and Price Analysis; Marketing.

Ano: 2002

URL: http://purl.umn.edu/28588

Haigh, Michael S.; Bryant, Henry L..

The effects of volatility of barge and ocean freight prices on prices throughout the international grain-marketing channel are analyzed using a Multivariate GARCH-M model. The model is used to infer the extent to which transportation price risk affects the level of international grain prices. Results indicate that both barge and ocean price volatility influence grain prices, but barge price volatility tends to have a greater impact on grain prices than that arising from ocean price volatility. The lack of a futures contract for barge rates may be partially responsible for its significant influence on grain price levels.

DISCUSSANT'S COMMENTS FOR AMERICAN AGRICULTURAL ECONOMICS ASSOCIATION ANNUAL MEETING, SELECTED PAPERS SESSION SP-3S, "PRICE ANALYSIS OF FOREIGN MARKETS"

Palavras-chave: Barge and ocean freight prices; Futures contracts; Multivariate GARCH-Models; Price volatility; International Relations/Trade.

Ano: 2000

URL: http://purl.umn.edu/18934

Haigh, Michael S..

This is a potpourri of price analyses involving developed, developing and transition economies. Papers included in this session: Dynamics of Polish Wheat Prices in Comparison to Selected World Prices in a Period of Economic Transformation, Szczepan Figiel, Olsztyn University of Agriculture and Technology. Economic and Environmental Impacts of the Post-1992 CAP Reforms on Alentejo Economy of Portugal, Amilcar Serrao, Universidade de Evora. Effects of Dutch Mineral Policies on Land Prices: A Micro Economic Simulation Approach, Maroeska Boots, Alfons Oude Lansink, and Jack Peerlings. Maize Markets and Rural Storage in Mozambique: A Spatial and Temporal Analysis, Channing Arndt, Purdue University; Rico Schiller...

DO PROFESSIONAL TRADERS EXHIBIT MYOPIC LOSS AVERSION? AN EXPERIMENTAL ANALYSIS

Palavras-chave: Demand and Price Analysis; International Development.

Ano: 1998

URL: http://purl.umn.edu/20949

Haigh, Michael S.; List, John A..

Two behavioral concepts, loss aversion and mental accounting, have recently been combined to provide a theoretical explanation of the equity premium puzzle. Recent experimental evidence suggests that undergraduate students' behavior is consistent with this "myopic loss aversion" conjecture. Our suspicion is that, much like certain anomalies in the realm of riskless decisions, these behavioral tendencies will be severely attenuated when real market players are put to the task. Making use of a unique subject pool-professional futures and options pit traders recruited from the Chicago Board of Trade-we do find behavioral differences between professionals and students. Yet, rather than discovering that the anomaly disappears, the data suggest that...

INTEGRATION AND CAUSALITY IN INTERNATIONAL FREIGHT MARKETS--MODELING WITH ERROR CORRECTION AND DIRECTED ACYCLIC GRAPHS

Palavras-chave: Marketing.

Ano: 2002

URL: http://purl.umn.edu/28554

Haigh, Michael S.; Nomikos, Nikos K.; Bessler, David A..

Using Directed Acyclic Graphs (DAG's) and Error Correction Models we study the dynamics of the notoriously volatile international freight prices that comprise the Baltic Panamax Index, the index on which freight futures trading is based. The DAG's are used to make definitive statements about the contemporaneous correlations between prices and allow us to address the construction of the data-determined orthoganization on contemporaneous innovation covariance, critical in providing sound inference in innovation accounting techniques. Our results provide a rich source of information on price discovery over various time horizons and suggest that the index may not be appropriately comprised and weighted.

COMBINING TIME-VARYING AND DYNAMIC MULTI-PERIOD OPTIMAL HEDGING MODELS

Palavras-chave: International Relations/Trade.

Ano: 2002

URL: http://purl.umn.edu/28558

This paper presents an effective way of combining two popular, yet distinct approaches used in the hedging literature dynamic programming (DP) and time-series (GARCH) econometrics. Theoretically consistent yet realistic and tractable models are developed for traders interested in hedging a portfolio. Results from a bootstrapping experiment used to construct confidence bands around the competing portfolios suggest that while DP-GARCH outperforms the GARCH approach they are statistically equivalent to the OLS approach when the markets are stable. Significant gains may be achieved by a trader, however, by adopting the DPGARCH model over the OLS approach when markets exhibit excessive volatility.

VOLATILITY SPILLOVERS BETWEEN FOREIGN EXCHANGE, COMMODITY AND FREIGHT FUTURES PRICES: IMPLICATIONS FOR HEDGING STRATEGIES

Palavras-chave: Marketing.

Ano: 2002

URL: http://purl.umn.edu/28593

INFORMATION CASCADES: EVIDENCE FROM A FIELD EXPERIMENT WITH FINANCIAL MARKET PROFESSIONALS

Palavras-chave: Hedging; Multivariate GARCH; Foreign exchange; Freight and commodity futures; Financial Economics; International Relations/Trade.

Ano: 1999

URL: http://purl.umn.edu/21625

Alevy, Jonathan E.; Haigh, Michael S.; List, John A..

In settings characterized by imperfect information about an underlying state of nature, but where inferences are made sequentially and are publicly observable, decisions may yield a "cascade" in which everyone herds on a single choice. While cascades potentially play a role in a variety of settings, from technology adoption to social processes such as mate selection, understanding cascade phenomena is imperative for financial markets. Previous empirical efforts studying cascade formation have used both naturally occurring data and laboratory experiments. In this paper, we combine one of the attractive elements of each line of research-observation of market professionals in a controlled environment-to push the investigation of cascade behavior into...

COINTEGRATION ANALYSIS OF UNBIASED EXPECTATIONS IN THE BIFFEX FREIGHT FUTURES MARKET

Palavras-chave: Financial Economics.

Ano: 2003

URL: http://purl.umn.edu/28608

Haigh, Michael S..

The continued survival of the Baltic International Freight Futures Exchange (BIFFEX), based at the London International Financial Futures Exchange (LIFFE), has come as a surprise to many critics of this unique futures market (the only futures contract on a service). The level of trading activity remains low and the number of players limited, and as a result, this has disappointed advocates of the use of derivatives in the shipping market. Therefore, in an effort to explain, at least partially, the reasons for its continued success, this paper tests long-term and short-term unbiasedness in the freight futures market with respect to its ability to unbiasedly predict future spot prices, using cointegration and error-correction techniques. Findings show that...