A tale of two coffees? Analysing interaction and futures market efficiency
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 5 February 2020
Issue publication date: 24 February 2020
Abstract
Purpose
The purpose of this paper is to assess the informational efficiency of Arabica (other milds) and Robusta coffee futures markets in terms of predicting future coffee spot prices.
Design/methodology/approach
Futures market efficiency is associated with the existence of a long-run equilibrium relationship between spot and future prices such that coffee futures prices are unbiased predictors of future spot prices. This study applies unit root testing to daily data for futures-spot price differentials. A range of maturities for futures contracts are considered, and the study also uses a recursive approach to consider time variation in futures market efficiency.
Findings
The other milds and Robusta futures prices tend to be unbiased predictors for their own respective spot prices. The paper further finds that other milds and Robusta futures prices are unbiased predictors of the respective Robusta and other milds spot prices. Recursive estimation suggests that the futures market efficiency associated with these cross cases has increased, though with no clear link to the implementation of the 2007 International Coffee Agreement.
Originality/value
The paper draws new insights into futures market efficiency by examining the two key types of coffee and analyses the potential interactions between them. Hitherto, no attention has been paid to futures contracts of the Robusta variety. The employment of unit root testing of spot futures coffee price differentials can be viewed as more stringent than an approach based on non-cointegration testing.
Keywords
Acknowledgements
There are no funders to report for this submission. The authors thank José Leibovich and María Paula Yoshida for help in obtaining some data. The authors are also grateful for helpful comments and suggestions made by the Reviewers and Yang (Greg) Hou. The usual disclaimer applies.
Citation
Holmes, M.J. and Otero, J. (2020), "A tale of two coffees? Analysing interaction and futures market efficiency", Studies in Economics and Finance, Vol. 37 No. 1, pp. 89-109. https://doi.org/10.1108/SEF-09-2019-0356
Publisher
:Emerald Publishing Limited
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