Hostname: page-component-7bb8b95d7b-s9k8s Total loading time: 0 Render date: 2024-09-19T11:00:22.514Z Has data issue: false hasContentIssue false
  • English
  • Français

Hog Options: Contract Redesign and Market Efficiency

Published online by Cambridge University Press:  26 January 2015

Hernán A. Urcola  and
Scott H. Irwin
Hernán A. Urcola
Affiliation:
Agricultural Economics and Rural Sociology Area, National Institute of Agricultural Technology (INTA), Balcarce, Argentina
Scott H. Irwin
Affiliation:
Department of Agricultural and Consumer Economics, University of Illinois at Urbana, Champaign, IL
Get access Rights & Permissions [Opens in a new window]

Abstract

This article tests the efficiency of the hog options market and assesses the impact of the 1996 contract redesign on efficiency. We find that the hog options market is efficient, but some options yielded excess returns during the live hogs period but not during the lean hogs period. Our findings indicate that the hog options market is efficient and is consistent with the new contract improving the efficiency of the market. However, other market conditions such as lower transaction costs during the lean hogs period can also contribute to reduce expected option returns during the latter period.

Keywords

hog optionsmispricing perceptionscontract redesigntrading returnsC15G12G14Q13
Type
Research Article
Information
Journal of Agricultural and Applied Economics , Volume 42 , Issue 4 , November 2010 , pp. 773 - 790
Copyright
Copyright © Southern Agricultural Economics Association 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Black, F. “The Pricing of Commodity Contracts. ” Journal of Financial Economics 3(1976): 167–79.Google Scholar
Bollen, N.P.B. and Whaley, R.E. “Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?” The Journal of Finance 59(2004):711–53.CrossRefGoogle Scholar
Brittain, L., Garcia, P., and Irwin, S. “Live and Feeder Cattle Options Markets: Returns, Risk, and Volatility Forecasting.” NCCC-134 Conference Proceedings, 2009, pp. 1–25. Internet site: http://www.farmdoc.uiuc.edu/ncccl34 (Accessed May 2010).Google Scholar
Chan, L.H., and Lien, D.D. “Cash Settlement and Price Discovery in Futures Markets.” Quarterly Journal of Business and Economics 40(2001): 65–77.Google Scholar
Covai, J.D., and Shumway, T. “Expected Option Returns.” The Journal of Finance 56(2001): 983–1009.Google Scholar
Ditsch, M.W., and Leuthold, R.M. “Evaluating the Hedging Potential of the Lean Hog Futures Contract.” OFOR Working Paper 96-03, Dept. of Ag. and Cons. Econ., University of Illinois at Urbana-Champaign, 1996.CrossRefGoogle Scholar
Eales, J.S., Engel, B.K., Hauser, R.J., and Thompson, S.R. “Grain Price Expectations of Illinois Farmers and Grain Merchandisers.” American Journal of Agricultural Economics 72(1990):701–8.Google Scholar
Egelkraut, T.M., and Garcia, P. “Intermediate Volatility Forecast Using Implied Forward Volatility: The Performance of Selected Agricultural Commodity Options.” Journal of Agricultural and Resource Economics 31(2006): 508–28.Google Scholar
Fama, E. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance 25(1970):383–417.CrossRefGoogle Scholar
Fama, E. “Market Efficiency, Long-Term Returns, and Behavioral Finance.” Journal of Financial Economics 49(1998):283–306.Google Scholar
Frank, J., Garcia, P., and Irwin, S.H. “To What Surprises Do Hog Futures Markets Respond?” Journal of Agricultural and Applied Economics 40(2008):73–87.Google Scholar
Greene, W.G. Econometrics Analysis. 3rd ed. Upper Saddle River, NJ: Prentice Hall, 1997.Google Scholar
Hauser, R.J., and Liu, Y. “Evaluating Pricing Options Models for Options on Futures.” Review of Agricultural Economics 14(1992):23–32.Google Scholar
Irwin, S.H. “Research Directions in Commodity Options—Academic and Practitioner Views.” Review of Futures Markets 9(1990):134–55.Google Scholar
Jensen, M. “Some Anomalous Evidence Regarding Market Efficiency.” Journal of Financial Economics 6(1978):95–101.CrossRefGoogle Scholar
Kenyon, D.E. “Producer Ability to Forecast Harvest Corn and Soybean Prices.” Review of Agricultural Economics 23(2001): 151–62.Google Scholar
Kimle, K., and Hayenga, M. “Cash Settlement as an Alternative Settlement Mechanism for the Live Hog Futures Contract.” Staff General Research Papers 11639. Department of Economics, Iowa State University, 2004.Google Scholar
Koekebakker, S., and Lien, G. “Volatility and Price Jumps in Agricultural Futures Prices—Evidence from Wheat Options.” American Journal of Agricultural Economics 86(2004): 1018–31.Google Scholar
Lawrence, J.D., and Grimes, G. “Production and Marketing Characteristics of Pork, U.S. Producers, 2006.” Iowa State University Working Paper # 07014, June 2007.Google Scholar
Lien, D., and Tse, Y.K. “A Survey on Physical Delivery versus Cash Settlement in Futures Contracts.” Working paper, Singapore Management University, 2003.Google Scholar
Manfredo, M.M., Leuthold, R.M., and Irwin, S.H. “Forecasting Fed Cattle, Feeder Cattle, and Corn Cash Price Volatility: The Accuracy of Time Series, Implied Volatility, and Composite Approaches.” Journal of Agricultural and Applied Economics 33(2001): 523–38.CrossRefGoogle Scholar
McKenzie, A., Thomsen, M., and Phelan, J. “How Do You Straddle Hogs And Pigs? Ask The Greeks!” Applied Financial Economics 17(2007): 511–20.Google Scholar
Patrick, G.F., Peiter, A.J., Knight, T.O., Coble, K.H., and Baquet, A.E. “Hog Producers' Risk Management Attitudes and Desire for Additional Risk Management Education.” Journal of Agricultural and Applied Economics 39(2007):671–87.Google Scholar
Shah, S., Brorsen, B.W., and Anderson, K.B. “Liquidity Costs in Futures Options Markets.” NCCC-134 Conference Proceedings, 2009, pp. 1-10. Internet site: http://www.farmdoc.uiuc.edu/necci34 (Accessed May 2010).Google Scholar
Simon, P. “Implied Volatility Forecasts in the Grains Complex.” Journal of Futures Markets 22(2001):959–81.Google Scholar
Szakmary, A., Ors, E., Kim, J.K., and Davidson, W.N., III. “The Predictive Power of Implied Volatility: Evidence from 35 Futures Markets.” Journal of Banking & Finance 27(2003):2151–75.CrossRefGoogle Scholar
Tversky, A., and Kahneman, D. “Judgment under Uncertainty: Heuristics and Biases.” Science 185(1974):1124–31.Google Scholar
Wang, G.H.K. Yau, J., and Baptiste, T. “Trading Volume and Transaction Costs in Futures Markets.” Journal of Futures Markets 17(1997): 757–80.Google Scholar