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Causality and Efficiency in the Coffee Futures Market

Author

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  • Kebede, Yohannes

Abstract

Tests for causality and rationality in the coffee futures market were carried out using data from the New York Market. Tests of causality indicated that futures prices strongly influence variations in spot price eight weeks or more to maturity. However, beginning seven weeks to maturity there seems to be a strong causal relationship going from futures to spot and from spot to futures. Risk constancy or neutrality, equality of risk premium and spot price, and efficiency were rejected for the period 18, 51, and 33 weeks or more to maturity. However, simultaneity of risk neutrality and efficiency was accepted for contracts with 55-77 weeks to maturity. The general conclusion from this study is that coffee futures market can be used as an indicator of spot market prices for contracts with 55-77 weeks to maturity. While benefits can be obtained through short term adjustment of available stock and making use of quality storage facilities, planning longer term planting and marketing decisions (e.g., ≥ 77 weeks) on the basis of futures market price can result in misallocation of resources and welfare loss.

Suggested Citation

  • Kebede, Yohannes, 1992. "Causality and Efficiency in the Coffee Futures Market," MPRA Paper 646, University Library of Munich, Germany, revised 1992.
    • Handle: RePEc:pra:mprapa:646
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    File URL: https://mpra.ub.uni-muenchen.de/646/1/MPRA_paper_646.pdf
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    References listed on IDEAS

    as
    1. Stein, Jerome L, 1980. "The Dynamics of Spot and Forward Prices in an Efficient Foreign Exchange Market with Rational Expectations," American Economic Review, American Economic Association, vol. 70(4), pages 565-583, September.
    2. Ronald I. McKinnon, 1967. "Futures Markets, Buffer Stocks, and Income Stability for Primary Producers," Journal of Political Economy, University of Chicago Press, vol. 75(6), pages 844-844.
    3. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-438, July.
    4. David A. Bessler & Jon A. Brandt, 1982. "Causality Tests in Livestock Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 64(1), pages 140-144.
    5. Sarahelen Thompson, 1986. "Returns to storage in coffee and cocoa futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 6(4), pages 541-564, December.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Maurice, Noemie & Davis, Junior, 2011. "Unravelling the underlying causes of price volatility in world coffee and cocoa commodity markets," MPRA Paper 43813, University Library of Munich, Germany, revised 2012.

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    More about this item

    Keywords

    Causality; Granger-causality; coffee; futures market; spot market; risk premium; efficiency; resource allocation; welfare;
    All these keywords.

    JEL classification:

    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • L79 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Other
    • F01 - International Economics - - General - - - Global Outlook
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • O21 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Planning Models; Planning Policy
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • Q13 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Markets and Marketing; Cooperatives; Agribusiness
    • M31 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising - - - Marketing
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • Q17 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agriculture in International Trade
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • L78 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Government Policy

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