Forecast Encompassing as the Necessary Condition to Reject Futures Market Efficiency: Fluid Milk Futures

Posted: 20 Dec 2005

See all articles by Dwight R. Sanders

Dwight R. Sanders

Southern Illinois University - Agribusiness Economics

Mark R. Manfredo

Arizona State University - Morrison School of Agribusiness and Resource Management

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Abstract

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 procedure of Harvey and Newbold, multiple forecast encompassing is tested using Chicago Mercantile Exchange fluid milk futures. Time series models and USDA experts provide competing forecasts. Results suggest milk futures do not encompass the information contained in the USDA forecasts at a two-quarter horizon. While the competing forecasts generate positive revenues, it is unlikely that returns exceed transaction costs in this relatively new market.

Keywords: forecast encompassing, milk futures, pricing efficiency

Suggested Citation

Sanders, Dwight R. and Manfredo, Mark Ronald, Forecast Encompassing as the Necessary Condition to Reject Futures Market Efficiency: Fluid Milk Futures. American Journal of Agricultural Economics, Vol. 87, No. 3, pp. 610-620, August 2005, Available at SSRN: https://ssrn.com/abstract=856520 or http://dx.doi.org/10.1111/j.1467-8276.2005.00751.x

Dwight R. Sanders (Contact Author)

Southern Illinois University - Agribusiness Economics ( email )

Carbondale, IL 62901-4515
United States
618-453-1711 (Phone)

Mark Ronald Manfredo

Arizona State University - Morrison School of Agribusiness and Resource Management ( email )

7001 E. Williams Field Road
Mesa, AZ 85212
480-727-1040 (Phone)
480-727-1961 (Fax)

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