Simultaneity, Rationality and Price Determination in US Live Cattle

The results of recent research on the informational efficiency of the US live cattle futures market are ambiguous. Moreover, simultaneous, rational expectations models of spot and futures markets for non‐storables are lacking in the literature. This paper addresses both issues: by developing a simultaneous rational expectations model of the US live cattle market, with functional relationships for short hedgers, long hedgers, net short speculators and consumers, the paper employs a wider information set than in previous research and it thus provides a more powerful test of the efficient market hypothesis (EMH). Tests indicate the possible presence of non‐linearities in the long hedging and net short speculation equations. The results suggest first, that there is support for Working’s hypotheses of selective and operational hedging, for short and long hedgers respectively, second that speculators may be noise traders or risk‐loving (although the non‐linear version of the speculation function partially corrects this anomaly), and third that beef is a normal good while corn is a complementary input. Time‐varying volatility is represented as an EGARCH (p, q) process. Post‐sample, this model does not significantly outperform the futures price in spot price forecasting, implying non‐rejection of the EMH.