Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960352 | Journal of Financial Economics | 2007 | 16 Pages |
Abstract
The behavioral finance literature cites the frozen concentrated orange juice (FCOJ) futures market as a prominent example of the failure of prices to reflect fundamentals. In contrast, we show that when theory clearly identifies the fundamental, e.g., at temperatures close to or below freezing, a close link exists between FCOJ prices and that fundamental. Using a simple, theoretically motivated, nonlinear, state dependent model, we can explain approximately 50% of the return variation on days with freezing temperatures. Moreover, while these observations represent less than 4.5% of the winter sample, they account for two-thirds of the entire winter return variability.
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Authors
Jacob Boudoukh, Matthew Richardson, YuQing (Jeff) Shen, Robert F. Whitelaw,