Fundamentals and Grain Futures Markets

Berna Karali, Olga Isengildina Massa and Scott H. Irwin

No 309633, 2019 Conference, April 15-16, 2019, Minneapolis, Minnesota from NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: A long-standing puzzle in commodity markets is the low explanatory power of supply and demand fundamentals for explaining the variability of prices in these markets. We apply an instrumental variables correction for measurement errors to investigate how noise in the surprise component of USDA Crop Production reports affects estimated price responses in corn, soybeans, and wheat futures markets from 1970 to 2016. Our findings demonstrate that after correcting for measurement error in market surprises, the explanatory power of fundamentals increases about three-fold and often exceeds 70%. This is compelling evidence that fundamentals are the main driver of price movements in grain futures markets.

Keywords: Crop; Production/Industries (search for similar items in EconPapers)
Pages: 29
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ags:n13419:309633

DOI: 10.22004/ag.econ.309633

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