What Explains the Orange Juice Puzzle: Sentiment, Smart Money, or Fundamentals?

41 Pages Posted: 16 Nov 2015

See all articles by Pin-Huang Chou

Pin-Huang Chou

National Central University

Chia-Hsun Hsieh

National Central University

Carl Hsin-han Shen

Macquarie University, Macquarie Business School

Date Written: August 2015

Abstract

In the famous “orange juice puzzle,” a large amount of inexplicable price volatility arises in frozen concentrated orange juice (FCOJ) futures contracts. Temperature is considered the most important fundamental factor in this market, but its explanatory power is low and limited, so are those of various consumer and stock market sentiment measures that reflect the noise traders’ opinions. In contrast, shifts in a survey-based index called the Consensus Bullish Sentiment Index (CBSI), which reflect the overall opinions of professional investors, provide the largest explanatory power among all measures. Further analysis reveals that bullish shifts in the CBSI are followed by higher FCOJ returns but lower conditional volatility, thus supporting the notion that the index reflects the smart money effect.

Keywords: orange juice; temperature; investor sentiment; smart money

JEL Classification: G12; G14

Suggested Citation

Chou, Pin-Huang and Hsieh, Chia-Hsun and Shen, Carl Hsin-han, What Explains the Orange Juice Puzzle: Sentiment, Smart Money, or Fundamentals? (August 2015). Journal of Financial Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2691052

Pin-Huang Chou (Contact Author)

National Central University ( email )

Department of Finance
Taoyuan, 32001
Taiwan
886-3-4227151 ext 66270 (Phone)
886-3-4252961 (Fax)

HOME PAGE: http://mgt.ncu.edu.tw/~choup

Chia-Hsun Hsieh

National Central University ( email )

No. 300, Zhongda Road
Chung-Li Taiwan, 32054
Taiwan

Carl Hsin-han Shen

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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