Ex Ante Basis Risk in the Live Hog Futures Contract: Has Hedgers' Risk Increased?

Basis behavior has a direct affect on hedging and pricing decisions. Here, ex ante basis risk for selected live hog cash markets is analyzed from 1985 through 1994. Econometric, time series, and naive (three year average) models are used to forecast a nearby live hog basis. Measures of basis risk are based on mean squared forecast errors and market timing ability. The fndings suggest that regardless of the forecasting method basis risk has not increased nor has basis predictability declined relative to historical levels. The recent decline in demand for futures contracts is likely attributable to other structural changes in the industry.