Forecast encompassing as the necessary condition to reject futures market efficiency

Fluid milk futures

Dwight R. Sanders, Mark Manfredo

Research output: Contribution to journalArticle

7 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)610-620
Number of pages11
JournalAmerican Journal of Agricultural Economics
Volume87
Issue number3
DOIs
StatePublished - Aug 2005

Fingerprint

fluid milk
United States Department of Agriculture
Milk
markets
USDA
new markets
Costs and Cost Analysis
time series analysis
income
milk
Futures markets
Forecast encompassing
methodology

Keywords

  • Forecast encompassing
  • Milk futures
  • Pricing efficiency

ASJC Scopus subject areas

  • Agricultural and Biological Sciences (miscellaneous)
  • Economics and Econometrics

Cite this

Forecast encompassing as the necessary condition to reject futures market efficiency : Fluid milk futures. / Sanders, Dwight R.; Manfredo, Mark.

In: American Journal of Agricultural Economics, Vol. 87, No. 3, 08.2005, p. 610-620.

Research output: Contribution to journalArticle

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