Identification by full adjustment: evidence from the relationship between futures and spot prices

Abstract

This paper proposes a test for orthogonality of the errors in a vector error-correction model (VECM) that focuses on the recursive ordering among the contemporaneously correlated errors. The test is based on the fact that when the frequency of the data is sufficiently low one of the variables in the long-run equilibrium relationship adjusts fully within the same period to its new equilibrium level. An empirical investigation of the relationship between spot and futures prices for commodities traded on the Amsterdam Exchanges and the Chicago Board of Trade reveals that the spot price adjusts fully to its new equilibrium level if the price-discovery function of the futures market works well.

Asymmetric spot‐futures price adjustments in grain markets

“…This study contributes to the literature by examining the nonlinear dynamic relationship between spot and futures prices in grain markets using threshold and M‐TAR models. The empirical results reaffirm the cointegrating relationship as suggested in Brockman and Tse () and Kuiper et al (). Furthermore, the results indicate the existence of spot‐futures price asymmetries for both corn and soybeans.…”

Price leadership within a marketing channel: A cointegration study

“…Unfortunately, in a multiple-product framework such a system becomes rather unwieldy and it becomes difficult to solve the problem of short-run identification. Nevertheless, the approaches reported by Harbo, Johansen, Nielsen, andRahbek (1998), Kuiper, Pennings, andMeulenberg (2002), Pesaran, Shin, & Smith (2000), Rahbek and Mosconi (1999), Spirtes, Glymour, and Scheines (2001), and Swanson and Granger (1997) are among those offering ways to overcome these problems.…”

Time‐varying Hedge Ratios: A Principal‐agent Approach

“…The resulting gross returns from these sales, minus the wholesalers’ expenses, are distributed across the farmers, in proportion to the amount of potatoes delivered. The reason non‐fixed price arrangements have been adopted is because wholesalers wish to retain their core suppliers by offering them contracts that bear some relation to the market price, as these suppliers can use the potato futures contract of the Amsterdam Exchanges 9 for hedging purposes (see Kuiper et al. , 2002), and for price discovery.…”

“…As they contain less noise, such lower‐frequency data could better reveal economic relationships of interest for crop farmers and the management of the futures exchange (see, e.g. Kuiper et al. , 2002), such as the relationship between yield variability and the optimal hedge ratio.…”