Risk premiums, market efficiency and optimal hedging. The case of cocoa futures markets.
2012 (English)Conference paper, Presentation (Other academic)
It is widely believed that speculative activity has increased progressively in the cocoa futures markets. Some believe that speculators move the futures markets away from their fundamentals thereby distorting relative prices and intensifying price volatility. This study, therefore, examines the efficiency of the price discovery mechanism in cocoa futures markets over the period 1982-2010.
We find that cash and futures prices are non-stationary and cointegrate to stationary vector. Price discovery is done in the cash market and spreads to the futures markets. It seems as if futures prices are determined by a markup on cash prices, or the cost of carry. The cash price on the other hand appears to be a random walk implying that markets are efficient. Liberalization of market and the possibility of increased speculation seem to have little influence on price formation and the relation between cash and futures prices. The findings provide support for not hedging since cash prices incorporate all information, and support for hedging in the case of cash flow limitations since futures prices are determined in an efficient way.
Place, publisher, year, edition, pages
Efficient Markets, Price discovery, Commodities, Cocoa
IdentifiersURN: urn:nbn:se:liu:diva-90056OAI: oai:DiVA.org:liu-90056DiVA: diva2:611948
17th Annual Conference of the African Econometric Society (AES 2012), July 25-27, Kampala, Uganda