FORECAST ENCOMPASSING AND FUTURES MARKET EFFICIENCY: THE CASE OF MILK FUTURES

The traditional necessary condition for futures market inefficiency is the existence of alternative forecasting methods that produce mean squared forecast errors smaller than the futures market. Here, a more exacting requirement for futures market efficiency is proposed—forecast encompassing. Using the multiple forecast encompassing procedure of Harvey and Newbold, forecast encompassing is tested with the CME fluid milk futures contract. Time series models and experts at the USDA provide the competing forecasts. The results suggest that the CME fluid milk futures do not encompass the information contained in the USDA forecasts at a two-quarter forecast horizon. While the competing forecasts generate positive revenues, it is unlikely that trading returns would exceed transaction costs in this relatively new futures market.


Subject(s):
Issue Date:
2004
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/20267
Total Pages:
29
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2017-08-24

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