Establishing the Presence of a Risk Premium in the Cocoa Futures Market: An Econometric Analysis

Stephen Armah

No 6778, 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Previous attempts at identifying and estimating a time-varying risk premium in the cocoa futures market yielded conflicting results. Using a longer series that includes the most recent cash and futures data, the existence of a time-varying risk premium in the cocoa futures market is re-investigated using LM ARCH tests and a Quadratic ARCH in Mean Error Correction Model. In contrast to available research the time series properties of the data are carefully accounted for by employing the most recent econometric techniques in testing for the presence of a risk premium. No evidence is found in support of a positive time-varying [or constant] risk premium in the cocoa futures market at conventional significance levels. The result suggests that cocoa producing countries have one less cost to consider in deciding whether or not to hedge cocoa price risk using futures contracts.

Keywords: Agribusiness; Marketing (search for similar items in EconPapers)
Pages: 28
Date: 2008
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea08:6778

DOI: 10.22004/ag.econ.6778

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