Risk and return in cattle and hog futures

Abstract

onsiderable controversy exists over the amount of risk in futures markets.C Keynes (1930, p. 137; see Peck 1983, p. 68) believed that futures prices are quite variable and thus price risk is associated with the ownership of futures contracts. He believed that risk premiums are paid by hedgers to speculators for bearing risk.' Keynes estimated the risk premiums to be sizable-that is, on the order of 10 to 20% per annum.A different approach to examining risk is provided by the capital asset pricing model (CAPM). According to the CAPM, risk-which is called systematic risk in CAPM terminology-is determined from the covariance between the return on an asset and the return on the market portfolio of all assets. As the covariance increases, the risk associated with the ownership of an asset increases. An asset whose return has a high covariance with the return on the market portfolio is risky because including it in a portfolio increases the variability of the portfolio's return. By contrast, an asset whose return has a low covariance with the return on the market portfolio is not risky because including it will have little effect on the variability of the portfolio's return. Dusak (1973) first applied the CAPM to commodities and found that the returns from owning wheat, corn, and soybean futures had essentially zero covariance with the return on the market portfolio. She concluded that even though grain and soybean futures prices are quite variable, ownership of futures *This research was partially completed while Emmett Elam and Daniel Vaught were Assistant Professor and Graduate Research Assistant, respectively, at the Dept. of Agricultural Economics and Rural Sociology, University of Arkansas.'Speculators, as a lot, were viewed as providing insurance against changes in prices and not as prophets of what prices would be in the future. In Keynes' (see Peck, 1983, p. 67) words, Indeed without paying the slightest attention to the prospects of the commodity he [speculator] deals in or giving a thought to it, he may, one decade with another, earn substantial remuneration merely by running risks and allowing the results of one season to average with those of others just as an insurance company makes profit without pretending to know more about an individual's prospects of life or the chances of his house taking fire than he knows himself.

Do futures prices for commodities embody risk premiums?

“…Nevertheless, it is fair to say that, if there do exist candidates that seem to fit the backwardation mold, the livestock commodities are the prime ones. The finding of significantly positive returns is fairly consistent over a number of different subperiods.23 Others have noted the persistent tendency for livestock futures to be downward biased estimates of eventual spot prices.24 In this context it is interesting to note that Breeden ( 1 980) found significantly positive consumption betas for futures in this category; as did Carter et al (1983) and Elam and Vaught (1988) using a standard CAPM framework with the market proxied by a weighted average of the S&P 500 and the Dow Jones Commodity Index.25 There are some theories about why these commodities may be different. For example, Koppenhaver (1 983) notes that "one possible explanation of the risk premiums.…”

An evolutionarily stable strategy and the critical point of hog futures trading entities based on replicator dynamic theory: 2006–2015 data for China’s 22 provinces

“…These authors found that from 1998 to 2004, the hog futures market was an unbiased predictor of cash prices. Elam and Vaught [ 10 ] also discussed the risks and benefits of hog futures. These studies all show that the hog futures market must actively cultivate hedgers, guide the appropriate speculators and crack down on excessive speculators, thereby preventing excessive speculation, which leads to market instability.…”

Systematic risk and returns to stock index futures contracts: International evidence

“…3Again there are difficulties in interpreting the alpha values as excess returns given zero investment but this too has become standard practice. 4The main studies of commodity futures in addition to that by Dusak (1973) are Carter, Rausser, and Schmitz (1983); Baxter, Conine, and Tamarkin (1985); So (1987); Elam and Vaught (1988);…”

“…In addition, Breeden (1980) applies a different version of the CAPM, using the consumption beta model. 'See Dusak (1973); Carter, Rausser, and Schmitz (1983); Marcus (1984); Baxter, Conine, and Tamarkin (1985); and Elam and Vaught (1988). 6The CAPM provides no insight into what the appropriate interval for analysis should be.…”