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Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting

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  • Brittain, Lee
  • Garcia, Philip
  • Irwin, Scott H.

Abstract

The paper examines empirical returns from holding thirty- and ninety-day call and put positions, and the forecasting performance of implied volatility in the live and feeder cattle options markets. In both markets, implied volatility is an upwardly biased and inefficient predictor of realized volatility, with bias most prominent in live cattle. While significant returns exist holding several market positions, most strategies are strongly affected by a drift in futures market prices. However, the returns from selling live cattle puts are persistent, and evidence from straddle returns identifies that the market overprices volatility. This overpricing is consistent with a short-term risk premium whose effect is magnified by extreme changes in market conditions.

Suggested Citation

  • Brittain, Lee & Garcia, Philip & Irwin, Scott H., 2009. "Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting," 2009 Conference, April 20-21, 2009, St. Louis, Missouri 53038, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc09:53038
    DOI: 10.22004/ag.econ.53038
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    References listed on IDEAS

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    1. Szakmary, Andrew & Ors, Evren & Kyoung Kim, Jin & Davidson, Wallace III, 2003. "The predictive power of implied volatility: Evidence from 35 futures markets," Journal of Banking & Finance, Elsevier, vol. 27(11), pages 2151-2175, November.
    2. Andrew McKenzie & Michael Thomsen & Josh Phelan, 2007. "How do you straddle hogs and pigs? Ask the Greeks!," Applied Financial Economics, Taylor & Francis Journals, vol. 17(7), pages 511-520.
    3. Good, Darrel L. & Irwin, Scott H. & Isengildina, Olga, 2006. "The Value of USDA Situation and Outlook Information in Hog and Cattle Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(2), pages 1-21, August.
    4. Egelkraut, Thorsten M. & Garcia, Philip, 2006. "Intermediate Volatility Forecasts Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(3), pages 1-21, December.
    5. Yanhong H. Jin & Gabriel J. Power & Levan Elbakidze, 2008. "The Impact of North American BSE Events on Live Cattle Futures Prices," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 90(5), pages 1279-1286.
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    Cited by:

    1. Andres Trujillo-Barrera & Philip Garcia & Mindy L Mallory, 2018. "Short-term price density forecasts in the lean hog futures market," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 45(1), pages 121-142.
    2. Miao Zhen & James Rude & Feng Qiu, 2018. "Price Volatility Spillovers in the Western Canadian Feed Barley, U.S. Corn, and Alberta Cattle Markets," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 66(2), pages 209-229, June.
    3. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Parametric Bootstrap Tests for Futures Price and Implied Volatility Biases with Application to Rating Livestock Margin Insurance for Dairy Cattle," Staff Papers 135077, University of Minnesota, Department of Applied Economics.
    4. Adrian Fernandez‐Perez & Bart Frijns & Ilnara Gafiatullina & Alireza Tourani‐Rad, 2019. "Properties and the predictive power of implied volatility in the New Zealand dairy market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(5), pages 612-631, May.

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