Influence of Weather Variability on the Orange Juice Prices
17 Pages Posted: 10 Jun 2012 Last revised: 25 Oct 2012
Date Written: June 9, 2012
The aim of the paper is to emphasize the dependence between the return of the futures price of the frozen concentrated orange juice (FCOJ) and the variation of the temperature. Following Roll (1984) that proved that the market of frozen concentrated juice is influence by weather variable, we consider the impact of temperature through a double mechanism. On one hand we assess the FCOJ price variability generated by the link between weather conditions and structural demand on orange juice. On the other hand we explore the behavioural effect of temperature on the strategy of trading agents implied in the market making of orange juice prices. Both effects imply a positive dependency between the temperature variations and FCOJ futures returns. We build a alpha providing investment strategy using the temperature forecasts as leading inputs for taking long and short positions on the FCOJ front month future contracts.
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