Seasonality and basis adjustments in the frozen concentrated orange juice futures market

341 Pages·2013·21.61 MB·English

by  Malick, William Michael

SBASOHALIfY AUD BASIS ACJOSfMSMIS IN THE FECZEH
COHCBHTSAIEB OBAHGE JDICE FDfOSSS MAEKEf
By
flLLIAH K. MALICK
A DISSSSTATIOK PH2SMTED 10 ^BE GBADUAIE SCflOOl
OF TBI 0!3I?ERSIfY OF FLGBIDA IS
PARTIAL FDI.FIIIMEST OF THE BECUiaESENTS
F02 THE EBGBSl OF BGCICS OF PHILCSOPHY
GHIVBlSIfY OF FICEIES
1985
lCKK0KliDG.aiH1S
J
Ihs author expresses sincere appreciaticn to Dr, B- W.
i
Ward, Dr. H. R. langhaa. Dr. J. S. ShcD'kwilsr, and Dr. E- C. i
Littall for servi-Bg on his advisory coffimittes, Iheir
j
comments, criticisus, and suggssticns xipcn teviefcing the i
drafts of this laaEUscript served to improve it and «€r€
|
appreciated. A special note c± thanks is doe Br. B. W. I
i
Ward, chairiaan ct the advisory cofflmittee, for his
suggestions and guidance throughout the study.
Graditude is extcjnded to Ijo.nna Fillison and Detliie
Barstis for helping with the typing. Appreciation must also
be axpressed to the Food and Eesource Economics Departuent
for providing financial support throughout the author's
graduate studies.
11
TABLE 0? COSlEliTS
Page
ACKUCSLSDGUSMTS. , ii
LIST OF TIBLES . . vii
LIST OP riansES. . ix
.....
ABSTBACT nil
CHAPfEES
I MTEODOCTION
GeBsral Theoretical Backgxouad .-..-....
TBSfOhcsureotsapuenergaPeerrscoahbnIldnMeaaO•mrHubJ.esj.ctteehic-t.otjsdi..ovale-n.osdg...yF...C.O...J-....lu....tu....ra....s........,......,.....'!....*...',*,.,']*.". ^-1j775qgi
Overview
ig
II LITBHATUEE HE?IEW 20
IShteocrraygeofTheNoorrymal.,Backwardation of-t.he.M-ar.ke.t,... 2205
Storage Cost Comfonents -........, 29
Physical storage cos.ts........... 29
DetsEnCraioarsnikkviaaitnpirineeglaniiucgPfearfiildcyeiiteylSdp.r.e.ad.s.an.d S-t.or-ag,e........ 33332201
ParlaCMIlmaomheudepsteeeleCrssroiocltaoVlhefaayrt-iPUPaasrnerAecsalsemicoecstitentrfoErCMeohgdarEenealgsresasisoent.er.An.aClh.yasn.igse..s......... 43in£^i37olo
III BEVIEW OF THE MAHD-EISSE KCDSI ......... U6
Contributions of.t.he..Sa.rd.-D.as.se.M.od.el...... 46
Basis Patterns ---...... na
The Model Estimated. 52
Model Specificati.on.............. 53
Bisk Preaiuffl 56
iii
............
Convsnicnce yield.............. 57
Market liguidi.ty.............. 58
"Freeae tias. ............ 59
Frssza cccurrenca. ........... 60
Estimation and Ecsults. 61
Impact of Explanatory Variables Over Time . . 63
IV EE¥IS^4 OF Basis SESIDUAI RGVEI^EMS 67
V THEOEETICAL AEJUSfHEKIS TO IHE ICOJ BASIS. ... 8H
................
General Analysis ............ 81
Storage Tiieory Analysis. 93
Hypothesizrd Effect On.th.e.i.ar.d-.Ea.ss.e.M.od.el.. 96
Coavaaience yi.el.d.............. 97
HisK prsffliuia ............. 100
Harkat liguidi.ty.............. 101
Preeze hias. ............ 101
Freeze cccurrencs. 102
Hypothesized DyEaraics of Market Sdjustasents . 102
.......
VI ESTIMATION OF THE JDLY BASIS HODEI 118
Initial Estiiaates. ............ 119
Initial Specification ............ 120
Other Specifica.ti.on.s.............. 128
.Final Bstimates. 133
Eesults and Beview of..Va.ri.ab.le.D.ef.in.it.io.ns.... 135
Serial Correlation. ......... 135
Review of Estimaticn Prcileos. 139
Interpretation of the levised lard-Casse Modal . 142
VII SPECIPICATIOIS AHD ESTI.H.AT.IC.H.OF..CC.HS.TA.N.l.PE.BI.CD.
FEOe MATOaiTY MCDSIS lUS
Constant Period Versus Constant Contract Models, 149
Specifying a Constant Period Model for'.FC.OJ...... 152
Accounting for Season.al..Fl.uc.tu.at.io.s..... 152
Data Considerations 154
.Measuring Convenience Yield.an.d.E.is.k.Pr.ea.iu.Hi.... 156
Review of the Concepts. ..... ..... 156
The Alternative Ireatiaent ........ 157
Model Estimation ......... 15o
Initial Model Specification 168
Allowing for .Dynamics and Seaso.na.l.P.at.te.rn.s.. 177
Specification and Bssults. 177
One period lags in the depe.r.dent variable. 178
Yearly lags in the depende,nt variable. . . 183
Yearly and one perio.d.l.ag.s.in.t.he.....
dOethpeerndevnatriavtairoinasbleof the basic racdel. ... 118854
XV
ga<jg
.........
I:hsAMFcoidcenolaulntsijcfaregcIifdfooirpctaastdeiaonsic^ooadaneldl.rdei.sfuf.le.trse..nc.e.s............ 111888966
Alternative Specificaticns. 20S
VIII ISTSHPHE.TA.TI.OM..OF.B.BS.UI.IS.C.F.CO.KS.IA.Jil..PE.EI.OE..
MODELS 2U»
General Discussi.on....... 214
lPaegrgfeodrmaBnacseis Sesidual Varia.bl-e-s....,»,. 221151
AHanrtkiectipaltiogruyidiBtiyskanPdremFirueieaze Effects ..... 221I96
HontSfhhtleoyckBaSCstoiofscfklpEcEanfsefinedtcustasl Vari.ab.l.e .. .,....... 222222120
FSrtoecekzeEfBfiaesctsEomSiintbainnceaoatlis --.,..... 223203
Stock Effec.ts.O.ve.r.t.he.Y.ea.r......... 233
Dominance 236
Understan.d-in.g.Di,ff.er.en.ce,s.i.n .Hcnthlj Stock
TBlSaaoeksnaiigsEsnofgnBfaPuelnaactttsPCSeaotrtnontscestkrannaEsttf.fCeDocintfst-frea-rce.tnt.PSe.tros.cpke.c.tl.ie.vv..eel,.s..........1..',.1..', 22222*5444467905
low stock effect. ............." 258
AHvigehragsetocsktocekffeecftfect .....I 226614
BasiIsntSeerssiedausaolnalChacnognevseniCevnecreTiymieeld........ 226763
TCrheanndgses in Stocks --.«,., ........\ 227754
IX IMPilCATIOHS C? THE ESSQITS. . . 278
Theoretical.M-ar.ke,t .Pe.rf.or.ma.nc.e............,.,... 278
Stocks. 279
Seasonal Patterns 280
Imports 284
EHmepdgiirnigcalStrPaedrefgoiremasnc.e.....-..,.,..,...,,.. 229805
Expectations and Forecasting 293
B-Sguared and its Implications 293
SThiemulLaatgignegd BBaassiiss Sfeiessiidduuaall AVdarjiuasbtlmeents ...., 229945
laportance of Stable Parameters. .- 296
V
X SOHMAEY, COI5CI0SIOHS, AISB BESIABCE SUGGESTIONS . 298
....................
CSucfnficflfluarsyi-ons- ......................... 229998
Suggestions for lesearcli 301
APPBl^DICES
a TIES VaSYING faEAMElES EESUITS 303
B CO¥AEIA.NCE MaiEIClS 307
,...,..,-.........
LlSf 0? EEFSHENCSS 323
BIOGRAPHICAL SKETCH 326
vx
LIST OF TABLES
3.1 ihe Ward-Dasse aodel results- 62
5.1 aeview of relationships i,n the Sard-Dasse aicdel , 109
6.1 Variable means and standard deviations for the
1967-68 through 1973-14 seasons (229 cbservatioBs) 126
6.2 Variable means and standard deviations for the
1957-63 through 1981-82 seasons (489 cbservaticos) 127
6.3 Initial estiaates of the July basis residual
model over the original data period (1967-74) . . 129
6.4 Pinal estimates of ths July basis residual modsl. 136
6.5 Beview of variahle definitions* ..,..,.,. 137
7.1 Initial constant period estimates ... 170
7-2 "Variable defini.ti.on.s.f.or.t.he.i.ni.ti.al.c.on.st.an.t..
period model.
^-ji
1.3 Bceosnuslttasntfopreriaoddynuaiomdiecl ,ve.rs-io.n.of the initial ,. T79
7.4 Speesruilotdsaofdoarl.the..fi.na.l.ve.r.sion of the cons.t.an.t.. 192
7.5 cVoanrsitaabnlet mpeerainosdanmdodesltan.d.ar.d.d.eviations for the.. 193
7.6 Eroeoaduellt.s f.or..a .no.n-.dy.na.mi.c.v.er.sion.o,f.t.he,f,in.al,, 213
8.1 fSohorretcasrtunonandthelonbgasirsunreefsfideucatls-of-.th.e.c.r'op'.... 218
8.2 Estimated constant and monthly stock components
for different periods froK maturity . 224
8.3 Categorizing months as risk preiniuM, convenience
yield, free-ze--, .or.r.is.k-pr-em.iui.a.-.fr.ee.ze..bi.as..
doffiinant. 237
vii
Tails .I.§a,§
8.4 Ihe constant and mcnthly Icng run stock
componants for different periods from aatarity, . 246
8.5 Bean basis residual values ty mon.th..fo.r.th.e...
different periods from maturity 267
8.6 Monthly comparison of average.n.u.mb.sr.o.f.we.ek.s.o.f
supplies held hy prccessors 276
i.1 liKe varying parameter results for the four month
model 304
....
B.I Covariance matrix for the six month model 308
B.2 Covariance matrix fcr the five nccth Bcdel. ... 311
B.3 Covariance matrix fcr the four isonth model. ... 314
B,4 Covariance matrix fcr the three Hicnth BCdel ... 317
....
B.5 Covariance matrix fcr the two month model 320
ViXl
IISI OF F1G0BE3
......
1-1 Ifflforts of FCCJ by Florida Processors 10
2.1 Ike sapplj of storaga carve and its ccmpoBents- . m
3-1 ^ean July FCOJ tasis residual values 49
3-2 lypical PCOJ basis residual for tim..Ju-ly-c.on.tr.a.ct
and key periods during the seascn 50
3-3 ImnitnienrgacttihoenJuolfyexFpClOJanabtaosriys vxeasriidatbilaels.i.n.de.te.r-.. 64
4-1 July FCOJ basis residual Eovsments. 68
4.2 Four fflontii frcm maturity hasis-r.es.id«ua.l.la.cv.eHi.en.ts
based on various cash prices. 74
4.3 Various orange industry price mcvenients 78
5-1 Hypothesized effect of.u.np.re.di.ct.ed..import
increase on tha model . 10c
5.2 Hypothesized change in the CY{t} coefficient
over time , 112
5.3 Hypothteisimzeed.ch.a.ng.e-in-t,he..EP.{t.}.co.e,ff.ic,ie.nt...
over 113
5.4 Hypothesize,d.c-ha-ng-e -in.t.he,t.ot.al.f.re,ez.e.b.ia.s ..
over tiffle nq
5.5 Hypothesize.d.c.ha.ng-e .in.t.he,F.Z,{t}.c.oe.ff.ic.ie,nt...
over time 115
7-1 Traditi-on,al-.vi«ew-o.f.th.e-ii-pa,ct-c.f.st,oc.Jc.s .en.t,he.
basis 153
7.2 Comparison of the leg and inverse stock curves- , 161
IX
.fiaa£§ Page
7-3 Predicted and actual basis residual values for
the six aoath siodel 194
7.a Predicted and actual ba-si.s.r-es.id.ua.l.va.lu.es,.fo.r .
tlie five laonth aodel. 197
7.5 Predicted and actual ba.si-s-r,es.id.ua.l.va.lu.es..fo.r .
the four month model. 200
7.6 predicted and actual ba.si.s.r.es.id.ua.l.va.lu.es..fo.r .
tiie three month modsl 203
7.7 predicted and actual.ba.si.s.r.es.id.ua.l.va.lu.ss..fo.r .
the two month model 206
.......
8.1 An example of freeze bias doaainance 226
8.2 December stock effects for different periods from
ffiaturity 229
8.3 Impact of sto.c.ks.f.or..different Djon.th.s .to.s.at.u.ri.tj
during May. 231
8.4 Monthly stock eff.ec,t,s .fo.r.th.e,fi.v,e .month from
maturity model- 234
8.5 Stock eff.ec-ts..re-la«ti»ve-t,o.th.e.Ha,y,.t.wc,,mo.nt.h ..
effect, 242
8.6 FdiivfefermeonntthS{stt}ockvaleufefsect..ac.ro.ss.the year giv.e.n.. 244
8.7 fhe effect of stocks on .se.as.on.al.b.as.is..pa.tt.er.ns.
for the six month model 250
8.8 Ihe effect of stocks on seasonal basis patterns
for the five Bonth Bodel. 251
8.9 fhe affect of stocks on sea.so.n.al.b.as.is.p.at.t.er.ns.
for the four lEonth asodel. 252
8.10 Ihe effect of stocks on sea.so.n.al.b.as.is.p.at.te.r.ns.
for the three month aodel 253
8.11 fIohre etfhefecttwoofmonstthockmsodeoln s.e.as.on^al basis patterns 254
8-12 Coiaj)arison of seasonal effects across models
given S£t} eguals 0.8 ., 257
3.13 Implied seasonal cont-ra.c.t -mo.ve.me.nt.s.wh.en-.S{.t}..
eguals 0.8 259