Chavez, Marissa Joyce (2007-08). The efficiency of the U.S. cotton futures market (1986-2006): normal backwardation, co-integration, and asset pricing. Master's Thesis. Thesis uri icon

abstract

  • The efficiency of commodity futures markets is a widely debated topic in academia. The cotton futures market is no exception. The existence of trends in the futures market is characterized as a price bias, which is a testable trait. When analyzed, it allows a better understanding of market behavior and allows implementation of more effective income enhancing and/or risk reducing strategies. Three different approaches will be used to test the efficiency of the U.S. cotton futures market: pricing patterns, cointegration, and asset-pricing. In the first approach, pricing patterns, statistical methodology was applied to a dataset of daily futures prices. Returns did not show a consistent trend, supporting arguments of efficiency. Further research into seasonally-differentiated contracts has yielded strong evidence of declining prices. This result differs from previously published work in the most comprehensive study of futures prices, while updating and extending information on pricing patterns in the cotton futures market. Co-integration, the second approach, is a popular method for testing the efficiency of various commodity future and cash markets. Evidence indicates that the cotton futures and cash markets are co-integrated over the last ten years. Results lead to the conclusion that price is discovered in the cotton futures market, reinforcing the notion of an efficient cotton futures market that serves as an indicator for future cotton cash prices. The cotton futures market was also analyzed to explain price movements with an equilibrium asset-pricing framework, in the third approach. In particular, the cotton futures market was analyzed to determine if behavior displayed by the market could be explained by risks specific to the cotton futures contract. Cotton futures do not show significant risk premiums over other financial assets, again supporting the efficient market hypothesis. The three approaches implemented in this thesis are generally supportive of longrun efficiency in the U.S. cotton futures market. An updated analysis of the cotton futures market will allow market participants the most recent information on pricing patterns and the overall long-run behavior of the market. More effective trading and operating strategies can be implemented that will best meet needs of market participants.
  • The efficiency of commodity futures markets is a widely debated topic in
    academia. The cotton futures market is no exception. The existence of trends in the
    futures market is characterized as a price bias, which is a testable trait. When analyzed,
    it allows a better understanding of market behavior and allows implementation of more
    effective income enhancing and/or risk reducing strategies. Three different approaches
    will be used to test the efficiency of the U.S. cotton futures market: pricing patterns, cointegration,
    and asset-pricing.
    In the first approach, pricing patterns, statistical methodology was applied to a
    dataset of daily futures prices. Returns did not show a consistent trend, supporting
    arguments of efficiency. Further research into seasonally-differentiated contracts has
    yielded strong evidence of declining prices. This result differs from previously published
    work in the most comprehensive study of futures prices, while updating and extending
    information on pricing patterns in the cotton futures market.
    Co-integration, the second approach, is a popular method for testing the
    efficiency of various commodity future and cash markets. Evidence indicates that the
    cotton futures and cash markets are co-integrated over the last ten years. Results lead to the conclusion that price is discovered in the cotton futures market, reinforcing the
    notion of an efficient cotton futures market that serves as an indicator for future cotton
    cash prices.
    The cotton futures market was also analyzed to explain price movements with an
    equilibrium asset-pricing framework, in the third approach. In particular, the cotton
    futures market was analyzed to determine if behavior displayed by the market could be
    explained by risks specific to the cotton futures contract. Cotton futures do not show
    significant risk premiums over other financial assets, again supporting the efficient
    market hypothesis.
    The three approaches implemented in this thesis are generally supportive of longrun
    efficiency in the U.S. cotton futures market. An updated analysis of the cotton
    futures market will allow market participants the most recent information on pricing
    patterns and the overall long-run behavior of the market. More effective trading and
    operating strategies can be implemented that will best meet needs of market participants.

publication date

  • August 2007