http://hdl.handle.net/2142/684 (No description provided) Search the Channel search https://www.ideals.uiuc.edu/simple-search http://hdl.handle.net/2142/4063 Title: Opportunity Cost and Prudentiality: An Analysis of Futures Clearinghouse Behavior <br/> <br/>Authors: Baer, Herbert L.; France, Virginia G.; Moser, James T. <br/> <br/>Abstract / Summary: This paper develops a model which explains how the creation of a futures clearinghouse allows traders to reduce default and economize on margin. We contrast the collateral necessary between bilateral partners with that required when multilateral netting occurs. Optimal margin levels are determined by the need to balance the deadweight costs of default against the opportunity costs of holding additional margin. Once created, it may (but need not) be optimal for the clearinghouse to monitor the financial condition of its members. If undertaken, monitoring will reduce the amount of margin required but need not have any effect on the probability of default. Once created, it becomes optimal for the clearinghouse membership to expel defaulting members. This reduces the probability of default. Our empirical tests suggest that the opportunity cost of margin plays an important role in margin determination. The relationship between volatility and margins indicates that participants face an upward sloping opportunity cost of margin. This appears to more than offset the effects that monitoring and expulsion would be expected to have on margin setting. <br/> <br/>Keywords: futures clearinghouse http://hdl.handle.net/2142/4062 Title: Noise Trader Demand in Futures Markets <br/> <br/>Authors: Sanders, Dwight R.; Irwin, Scott H.; Leuthold, Raymond M. <br/> <br/>Abstract / Summary: Theoretical noise trader models suggest that uninformed traders can impact market prices. However, these models conclusions depend crucially on the assumed specification for noise trader demand. This research seeks to empirically determine the appropriate demand specification for uninformed traders. Using commercial market sentiment indices as proxies for noise trader demand, Granger causality models are estimated to examine the linear linkages between sentiment and futures returns. The models strongly suggest that noise traders are positive feedback traders (i.e., extrapolative expectations) with relatively long memories. <br/> <br/>Keywords: Granger causality model http://hdl.handle.net/2142/4061 Title: Evaluating the Hedging Potential of the Lean Hog Futures Contract <br/> <br/>Authors: Ditsch, Mark; Leuthold, Raymond M. <br/> <br/>Abstract / Summary: The lean hog futures contract is replacing the live hog futures contract at the Chicago Mercantile Exchange beginning with the February 1997 contract. The lean hog futures will be cash settled based on a broad-based lean hog price index, eliminating terminal markets from the price discovery process. Using this index over a twenty-month period as a proxy for the lean hog futures price, this paper compares the hedging effectiveness of the live hog futures contract to the hedging potential of the lean hog futures contract for cash live hogs as well as four cash meat cuts. Frozen pork bellies futures are also examined for the cash meats. Both long-term and short-term hedges are simulated, using the minimum-variance approach, which utilizes only unconditional information, and the Myers-Thompson approach that incorporates conditional information. The results show that the lean hog futures should perform better than either the live hog or the frozen pork bellies futures as a hedging instrument for Omaha cash hogs and cash loins. The strongest evidence of this is for the short-term hedging of cash hogs. For the other three meats, no futures contract demonstrated a clear hedging advantage. <br/> <br/>Keywords: cash meat; live hog futures http://hdl.handle.net/2142/4060 Title: Crop Yield and Price Distributional Effects on Revenue Hedging <br/> <br/>Authors: Tirupattur, Viswanath; Hauser, Robert J.; Chaherli, Nabil M. <br/> <br/>Abstract / Summary: The use of crop yield futures contracts is examined. The expectation being modeled here reflects that of an Illinois corn and soybeans producer at planting, of revenue realized at harvest. The effects of using price and crop yield contracts are measured by comparing the results of the expected distribution to the expected distribution found under five general alternatives: 1) a revenue hedge using just price futures, 2) a revenue hedge using crop yield futures, 3) an unhedged scenario where revenue is determined by realized prices and yields, 4) an unhedged scenario where revenue is determined by realized prices and yields and by participation in government support programs with deficiency payments, and 5) a no hedge scenario where revenue is determined by realized prices and yields and by participation in a proposed revenue-assurance program. We draw four major conclusions from the results. First, hedging effectiveness using the new crop yield contract depends critically on yield basis risk which presumably can be reduced considerably by covering large geographical areas. Second, crop yield futures can be used in conjunction with price futures to derive risk management benefits significantly higher than using either of the two alone. Third, hedging using price and crop yield futures has a potential to offer benefits larger than those from the simulated revenue assurance program. However, the robustness of the findings depends largely on whether yield basis risk varies significantly across regions. Finally, the qualitative results described by the above three conclusions do not change depending on whether yields are distributed according to the beta or lognormal distribution. <br/> <br/>Keywords: crop yield futures contracts; revenue hedge http://hdl.handle.net/2142/4059 Title: The Distributional Behavior of Futures Price Spread Changes: Parametric and Nonparametric Tests for Gold, T-Bonds, Corn and Live Cattle <br/> <br/>Authors: Kim, Min-Kyoung; Leuthold, Raymond M. <br/> <br/>Abstract / Summary: The distributional behavior for futures price spread changes is examined through parametric and nonparametric tests on four different commodities: corn and live cattle, and gold and T-bonds with two different sample sizes. Data are examined for selected periods, stable (1992) and unstable (1988). Remarkably different results were found over commodities, time period, and sample size. Actual spread changes for the smaller sample size of gold and T-bonds and of corn produced more normal distributions as intervals were widened from daily to weekly, while all live cattle spreads for actual changes were normally distributed. However, the larger sample size of both gold and T-bonds and the relative spread changes for both corn and live cattle did not converge to a normal distribution. The ‘best fit’ distribution was tested nonparametrically on all daily spread samples, and the logistic distribution prevailed, which supported the results of nonnormality from parametric distributional tests. <br/> <br/>Keywords: corn; live cattle http://hdl.handle.net/2142/4058 Title: Market Efficiency and Marketing to Enhance Income of Crop Producers <br/> <br/>Authors: Zulauf, Carl R.; Irwin, Scott H. <br/> <br/>Abstract / Summary: Recent changes in farm policy have renewed interest in using marketing strategies based on futures and options markets to enhance the income of field crop producers. This article reviews the literature surrounding the dominant academic theory of the behavior of futures and options markets, the efficient market hypothesis. The following conclusion is reached: while individuals can beat the market, few can consistently do so. This conclusion is consistent with Grossman and Stiglitz’s model of market efficiency in which individuals who consistently earn trading returns have superior access to information or superior analytical ability. One implication is that, with few exceptions, the crop producers who survive will be those with the lowest cost of production since efforts to improve revenue through better marketing will have limited success. There do appear to be some successful marketing strategies. One is to base storage decisions on when a producer harvests the crop relative to the national harvest of the crop. Another is to base storage decisions on whether the current basis exceeds the cost of storage, and then to use hedging to assure an expected positive return. <br/> <br/>Keywords: crop marketing http://hdl.handle.net/2142/4057 Title: Did Producer Opportunities in the Live Hog Contract Decline? <br/> <br/>Authors: Zanini, Fabio; Garcia, Philip <br/> <br/>Abstract / Summary: The paper assesses the usefulness of selective hedging strategies when combined with forecast techniques in the live hog contract. The use of routine futures and options hedging is not attractive relative to a cash-only strategy. However, forecasting and hedging can contribute to price risk management improvement for risk-averse producers. Consistent with previous research, the results indicate that the live hog contract continues to offer producers attractive pricing opportunities. The findings suggests that the success of the new lean value carcass contract may depend on its ability to attract trading volume from outside the traditional production sector. <br/> <br/>Keywords: selective hedging strategies; forecast techniques http://hdl.handle.net/2142/4056 Title: Estimation of Time-Varying Hedge Ratios for Corn and Soybeans: BGARCH and Random Coefficient Approaches <br/> <br/>Authors: Bera, Anil K.; Garcia, Philip; Roh, Jae-Sun <br/> <br/>Abstract / Summary: This paper deals with the estimation of optimal hedge ratios. A number of recent papers have demonstrated that the ordinary least squares (OLS) method which gives constant hedge ratio is inappropriate and recommended the use of bivariate autoregressive conditional heteroskedastic (BGARCH) model. In this paper we introduce the use of a random coefficient autoregressive (RCAR) model to estimate time varying hedge ratios. Using daily data of spot and futures prices of corn and soybeans we find substantial presence of conditional heteroskedasticity, and also of random coefficients in the regressions of return from the spot market on the return from the futures markets. Hedging performance in terms of variance reduction of returns from alternative models are also conducted. For our data set diagonal vech presentation of BGARCH model provides the largest reduction in the variance of the return portfolio. <br/> <br/>Keywords: optimal hedge ratios; RCAR model http://hdl.handle.net/2142/4055 Title: Do Brokers Misallocate Customer Trades? Evidence from Futures Markets <br/> <br/>Authors: Park, Hun Y.; Sarkar, Asani; Wu, Lifan <br/> <br/>Abstract / Summary: In the context of futures markets, we study whether brokers allocate more favorable trades to their own accounts, and less favorable trades to their customers. We find that, within a thirty minute trading bracket, brokers on average buy at a lower price and sell at a higher price for their own accounts relative to their customers. We show evidence that brokers’ price advantage may be compensation for providing liquidity to the market when brokers trade for their own accounts, but no evidence that they are due to brokers’ superior information, or to greater effort by brokers when trading for themselves. Consistent with the idea that, in a competitive market for brokerage services, brokers may pass on some of their profits to customers, we find that brokers who trade for themselves also provide superior execution for their customers, relative to brokers who do not trade for themselves. <br/> <br/>Keywords: brokerage services http://hdl.handle.net/2142/4054 Title: Optimal Hedging Strategies for the U.S. Cattle Feeder <br/> <br/>Authors: Noussinov, Mikhail A.; Leuthold, Raymond M. <br/> <br/>Abstract / Summary: Multiproduct optimal hedging is compared to alternative hedging strategies as applied to a Midwestern cattle feeder. One-period feeding margin hedge ratios are estimated using weekly cash and futures price data from a simulation of a custom feedlot for 1983 – 1995. Hedge ratios are estimated using the last 4 years, 6 years, or all prior data available at the moment of estimation; the ratios demonstrate less variability as the length of the underlying sample increases. Hypothesis of all hedge ratios being equal to each other, that leads to the proportional hedging model, is rejected. Means and variances of hedged feeding margins using the computed hedge ratios suggest that there is no consistent domination pattern among the alternative strategies. For the ratios computed based on all prior data available, all strategies are on the efficient frontier, leaving the hedging decision up to the agent’s degree of risk aversion. All hedging strategies are shown to significantly reduce the feeding margin’s means and variances compared to no hedging, with variance reduction always exceeding 50 percent. Whether a producer chooses multiproduct, single-commodity, or proportional hedge ratios is sensitive to the dataset and its size. <br/> <br/>Keywords: hedge ratios