Efficiency in Commodity Futures Markets

Abstract

This paper undertakes an econometric investigation of the efficiency of commodity futures markets. Despite a considerable diversity of views in the empirical literature, there is no general consensus on whether or not the markets are even approximately efficient. The paper analyses the operations of the futures markets for a number of commodities over the period 1976-88 and tests several hypotheses about the efficiency of the markets. Crops examined include wheat, maize, soyabeans, cocoa, coffee. The results suggest that for several commodities expected excess returns to futures speculation are non-zero, particularly for forecast horizons of more than three months. The analysis shows, however, that these results do not necessarily imply that markets are inefficient, or that agents do not act rationally. The paper also notes the implications of the study for the cost of using the futures markets for hedging and for the power of futures prices to forecast future spot prices.