Causality and Efficiency in the Coffee Futures Market

Yohannes Kebede
Authors registered in the RePEc Author Service: Yohannes Mariam

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Causality; Granger-causality; coffee; futures market; spot market; risk premium; efficiency; resource allocation; welfare (search for similar items in EconPapers)
JEL-codes: C22 C44 C51 D40 D41 E30 F01 F13 F14 L11 L78 L79 M31 O11 O13 O19 O21 O24 O55 Q13 Q17 (search for similar items in EconPapers)
Date: 1992-03-06, Revised 1992
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of International Food & Agribusiness Marketing 1.5(1993): pp. 55-71

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