The efficiency of commodity futures markets is a widely debated topic in
academia. The cotton futures market is no exception. The existence of trends in the
futures market is characterized as a price bias, which is a testable trait. When analyzed,
it allows a better understanding of market behavior and allows implementation of more
effective income enhancing and/or risk reducing strategies. Three different approaches
will be used to test the efficiency of the U.S. cotton futures market: pricing patterns, cointegration,
and asset-pricing.
In the first approach, pricing patterns, statistical methodology was applied to a
dataset of daily futures prices. Returns did not show a consistent trend, supporting
arguments of efficiency. Further research into seasonally-differentiated contracts has
yielded strong evidence of declining prices. This result differs from previously published
work in the most comprehensive study of futures prices, while updating and extending
information on pricing patterns in the cotton futures market.
Co-integration, the second approach, is a popular method for testing the
efficiency of various commodity future and cash markets. Evidence indicates that the
cotton futures and cash markets are co-integrated over the last ten years. Results lead to the conclusion that price is discovered in the cotton futures market, reinforcing the
notion of an efficient cotton futures market that serves as an indicator for future cotton
cash prices.
The cotton futures market was also analyzed to explain price movements with an
equilibrium asset-pricing framework, in the third approach. In particular, the cotton
futures market was analyzed to determine if behavior displayed by the market could be
explained by risks specific to the cotton futures contract. Cotton futures do not show
significant risk premiums over other financial assets, again supporting the efficient
market hypothesis.
The three approaches implemented in this thesis are generally supportive of longrun
efficiency in the U.S. cotton futures market. An updated analysis of the cotton
futures market will allow market participants the most recent information on pricing
patterns and the overall long-run behavior of the market. More effective trading and
operating strategies can be implemented that will best meet needs of market participants.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/ETD-TAMU-1883 |
| Date | 02 June 2009 |
| Creators | Chavez, Marissa Joyce |
| Contributors | Salin, Victoria |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Thesis, text |
| Format | electronic, application/pdf, born digital |
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