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The market efficiency hypothesis: the case of coffee and cocoa futures

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  • Jean Bosco Sabuhoro
  • Bruno Larue

Abstract

This study tests the market efficiency hypothesis for coffee and cocoa futures using daily data for contracts with a maturity of 2 and 6 months. The hypothesis is tested sequentially. The first condition is that future spot and futures prices be cointegraled. If this condition is maintained, market efficiency requires the cointegrating vector to support a (0, 1) restriction that can be likened to an unbiasedness condition. Finally, market efficiency imposes zero restrictions on the parameters of the variables expressed in first differences in the specification of the error‐correction representation of the relationship between future spot and futures prices. Brenner and Kroner [Brenner, R., Kroner, K., 1995. Arbitrage, cointegration, and testing the unbiasedness hypothesis in financial markets. Journal of Financial and Quantitative Analysis 30, pp. 23–42] argue that the cointegration condition is rarely met in practice. They attribute this outcome to potentially non‐stationary net cost‐of‐carry which would make the parameters of the cointegration relation unstable. It is for this reason that Hansen's tests [Hansen, B.E., 1992. Tests of parameter instability in regressions with I(1) processes. Journal of Business and Economic Statistics 10] about the stability of the parameters in cointegration regressions were used to supplement more traditional cointegration tests, Johansen and Juselius' cointegration tests [Johansen, S., Juselius, K., 1992. Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK, Journal of Econometrics 53] could not reject cointegration for all four contracts while Hansen's LC test favored cointegration only for the cocoa contracts. Nested and non‐nested testing procedures were used to test the (0, 1) restriction on the cointegration vector. Unbiasedness was found to be robust across testing procedures. However, further testing about the specification of the error‐correction representation revealed the existence of important short run deviations from unbiasedness, Even though these results hold strictly for a rather limited number of contracts and commodities, they are encouraging for futures markets advocates in developing countries.

Suggested Citation

  • Jean Bosco Sabuhoro & Bruno Larue, 1997. "The market efficiency hypothesis: the case of coffee and cocoa futures," Agricultural Economics, International Association of Agricultural Economists, vol. 16(3), pages 171-184, August.
    • Handle: RePEc:bla:agecon:v:16:y:1997:i:3:p:171-184
    DOI: 10.1111/j.1574-0862.1997.tb00452.x
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    3. Malini, Nair, 2005. "Arbitrage, Cointegration and Testing the Unbiasedness Hypothesis in Coffee Futures Traded at the CSCE," MPRA Paper 37857, University Library of Munich, Germany.
    4. Lin, Boqiang & Moubarak, Mohamed & Ouyang, Xiaoling, 2014. "Carbon dioxide emissions and growth of the manufacturing sector: Evidence for China," Energy, Elsevier, vol. 76(C), pages 830-837.
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    6. Ben Shepherd, 2005. "Market Power in International Commodity Processing Chains: Preliminary Results from the Coffee Market," International Trade 0511013, University Library of Munich, Germany.
    7. Gomez, Miguel I. & Castillo, Mauricio, 2001. "Structural Change, Rents Transferring And Market Power In The International Coffee Market: A Time Series Analysis," 2001 Annual meeting, August 5-8, Chicago, IL 20441, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    8. Jerry Coakley & Jian Dollery & Neil Kellard, 2011. "Long memory and structural breaks in commodity futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(11), pages 1076-1113, November.
    9. Zhou, Haijiang & Roberts, Matthew C. & Zulauf, Carl R., 2004. "Are Interest Rates Necessary For Temporal Cointegration? Evidence From The London Metal Exchange (Lme)," 2004 Annual meeting, August 1-4, Denver, CO 20095, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    10. Monika Krawiec & Anna Górska, 2021. "Are soft commodities markets affected by the Halloween effect?," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 67(12), pages 491-499.
    11. Xu, Bin & Lin, Boqiang, 2015. "Carbon dioxide emissions reduction in China's transport sector: A dynamic VAR (vector autoregression) approach," Energy, Elsevier, vol. 83(C), pages 486-495.
    12. Krzysztof Borowski & Malgorzata Lukasik, 2015. "Analysis of Selected Seasonality Effects in the Following Agricultural Markets: Corn, Wheat, Coffee, Cocoa, Sugar, Cotton and Soybeans," Eurasian Journal of Business and Management, Eurasian Publications, vol. 3(2), pages 12-37.
    13. Andrew McKenzie & Matthew Holt, 2002. "Market efficiency in agricultural futures markets," Applied Economics, Taylor & Francis Journals, vol. 34(12), pages 1519-1532.
    14. Lin, Boqiang & Wang, Xiaolei, 2014. "Promoting energy conservation in China's iron & steel sector," Energy, Elsevier, vol. 73(C), pages 465-474.
    15. Lin, Boqiang & Moubarak, Mohamed, 2014. "Renewable energy consumption – Economic growth nexus for China," Renewable and Sustainable Energy Reviews, Elsevier, vol. 40(C), pages 111-117.
    16. Armah, Stephen E., 2008. "Establishing the Presence of a Risk Premium in the Cocoa Futures Market: An Econometric Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6778, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    17. Lin, Boqiang & Moubarak, Mohamed, 2014. "Estimation of energy saving potential in China's paper industry," Energy, Elsevier, vol. 65(C), pages 182-189.
    18. Górska, Anna & Krawiec, Monika, 2017. "Analiza efektywności informacyjnej w formie słabej na rynkach „soft commodities” z wykorzystaniem wybranych testów statystycznych," Problems of World Agriculture / Problemy Rolnictwa Światowego, Warsaw University of Life Sciences, vol. 17(32, Part ), September.
    19. Wang, Xiaolei & Lin, Boqiang, 2016. "How to reduce CO2 emissions in China׳s iron and steel industry," Renewable and Sustainable Energy Reviews, Elsevier, vol. 57(C), pages 1496-1505.
    20. Gomez, Miguel I. & Koerner, Julia, 2009. "Do retail coffee prices increase faster than they fall? Asymmetric price transmission in France, Germany and the United States," Working Papers 55930, Cornell University, Department of Applied Economics and Management.
    21. Xu, Bin & Lin, Boqiang, 2016. "Assessing CO2 emissions in China’s iron and steel industry: A dynamic vector autoregression model," Applied Energy, Elsevier, vol. 161(C), pages 375-386.
    22. Lin, Boqiang & Zhang, Li & Wu, Ya, 2012. "Evaluation of electricity saving potential in China's chemical industry based on cointegration," Energy Policy, Elsevier, vol. 44(C), pages 320-330.

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