Revisiting the Determinants of Futures Contracts: The Curious Case of Distillers' Dried Grains

Abstract

Revisiting the Determinants of Futures Contracts: The Curious Case of Distillers' Dried Grains A futures market for distillers' dried grains (DDGs) was introduced on the Chicago Mercantile Exchange in early 2010, but became inactive only four months after its inception. While many new futures contracts do not develop into high-volume traders, significant interest from DDG cash market participants seemed to indicate that this contract could be successful. This study determines whether factors found in the literature to affect the success of futures contracts may have predicted the ineffectiveness of the DDG contract. We also test the impacts of market participants and the activeness of supporting futures markets, and use the empirical to determine whether the lack of activity in the ethanol futures market may have contributed to the ineffectiveness of the DDG contract. Estimation results indicate that while the existing literature would have predicted a high likelihood of success for a DDG futures contract, accounting for the inactiveness of the ethanol futures market led to the opposite conclusion.

Does the design of spot markets matter for the success of futures markets? Evidence from dairy futures

“…For example, jet fuel is a classic example of a market which is cross-hedged by a variety of oil-derived products. Bekkerman and Tejeda (2013) conclude that the activeness of the cash market, underlying cash market volatility, product homogeneity, industry vertical integration and market power concentration, and the activeness of the futures market with which cross-hedging opportunities exist are important factors in predicting a futures market's success. Their findings are in contrast to Brorsen and Fofana (2001), who report that homogeneity, vertical integration, and buyer concentration were not significantly correlated with success or failure.…”

“…Brorsen and Fofana (2001) consider product homogeneity (uniformity), vertical integration of the cash market, buyer concentration, and activeness of the cash market and report that an active cash market is the single characteristic that predicts whether a commodity may have a successful futures market. The study by Bekkerman and Tejeda (2013) examines the failure of the Distillers Dried Grains (DDG) contract on the Chicago Mercantile Exchange (CME). The authors identify the following factors which contribute to the success of new futures contracts:…”

Does the Design of Spot Markets Matter for the Success of Futures Markets? Evidence from Dairy Futures

“…Brorsen and Fofana (2001) consider product homogeneity (uniformity), vertical integration of the cash market, buyer concentration, and activeness of the cash market and report that an active cash market is the single characteristic that predicts whether a commodity may have a successful futures market. The study by Bekkerman and Tejeda (2013)  Cash price variability: A volatile cash market with substantial price uncertainty is more likely to develop a futures market than a market with little variability.…”