Cointegration Relations between Spot and Futures Prices for Storable Commodities: Implications for Hedging and Forecasting

OFOR Working Paper No. 94-12

Posted: 25 Aug 1999

See all articles by Richard Lu

Richard Lu

Feng Chia University

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign

Date Written: December 1994

Abstract

This study examines the spot and futures price relationships using the cointegration approach for two storable commodities, corn and soybeans, over a thirteen-year period 1980 to 1992. It is found that specifying a time dimension in the cointegration relation is important to finding evidence of cointegration. However, evidence of cointegration relations between the spot and futures prices is in general weak. In those cases where cointegration exists, the information of cointegration, as represented by the error correction term, contributes only slightly to hedging effectiveness. And, taking the estimation error into account, including the information of the error correction term does not generally improve the optimal hedging ratio. Finally, the information of cointegration was not found very useful for price forecasting, based on conditional efficiency and market timing criteria. All in all, identification of cointegrated price relationships in commodity spot and futures markets seems limiting, and when cointegration is found, its impact is minimal.

JEL Classification: G13, Q11

Suggested Citation

Lu, Richard and Leuthold, Raymond M., Cointegration Relations between Spot and Futures Prices for Storable Commodities: Implications for Hedging and Forecasting (December 1994). OFOR Working Paper No. 94-12. Available at SSRN: https://ssrn.com/abstract=5916

Richard Lu

Feng Chia University ( email )

100 Wenhwa Road
Talchung
Taiwan

Raymond M. Leuthold (Contact Author)

University of Illinois @ Urbana-Champaign ( email )

1301 W. Gregory Drive
326 Mumford Hall
Urbana, IL 61801
United States
217-333-1810 (Phone)
217-333-5538 (Fax)

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