Graduate Students Research

Matt Diersen
Ph.D. Candidate
University of Illinois
Urbana, Illinois

An important question is how soybean crushers respond to meal and oil price risk. Risk measures based on historic price variability have restricted testing for, and measuring, risk response. Futures and Options prices captures the market's expectations of both the level and variability of meal and oil prices. A model of soybean crushers uses meal and oil futures price as expected price when the output is sold. The variance of output price is calculated by weighting the implied volatility from meal and oil options, where the volatility has been adjusted to cover the time remaining until the output is sold. Because implied volatility is based on the return of holding an underlying futures position, output price variance can be measured in terms of portfolio of meal and oil. The results show that crushing output is positively related to meal and oil futures prices and negatively related to the variance of those prices.

Bryce Holt
M.S. Candidate
University of Illinois
Urbana, Illinois

The effects of futures trading by "the funds" is widely debated topic of academic research as well as a concern of industry participants. Part of debate evolves from the lack of the available data from which detailed analysis can be performed. This research, however, uses actual interest positions of hedge fund, commodity trading advisors, and commodity pool operators and analyzes the relationship between price volatility and the trading volume of managed money accounts. consistent with previous research, a positive relationship between volatility of trading of managed money account is found empirically. The research then utilizes the implications of efficient market theory to distinguish between uniformed noise trading or private information as the explanation for this positive relationship.

Mina kim
Ph.D. Candidate
University of Illinois
Urbana, Illinois

To manage the risks of price uncertainty, hedgers often use futures market to cover their spot positions. If successful management of price risks is achieved, then more correct decisions about hedging positions can be made. This requires a precise forecasting technique for prices, and accurate information on futures and spot prices--which may include an inter-commodity relationship as well as the degree of the volatility of spot and futures prices.
Optimal hedging theory will be developed within multiple-commodity hedging using a non-parametric estimation approach. the primary goal of this research is to analyze whether multi-product hedging has any value for live hog producers, and if it can be implemented to reduce the risks of return. Also, the optimal multi-product hedging will be compared to naive hedging, to no hedging, and to single-product hedging. Lean hogs are now traded instead of live hogs, and this may affect the optimal hedging position.

Hunberto Martinez
Ph.D. candidate
University of Illinois
Urbana, Illinois

This research is a study of the long-run spatial pricing dynamics of Mexican pork markets using weekly wholesale price data. Six cities comprise the sample to be studied during the period from 1992 through July, 1998. The application of multi-variate techniques of cointegration, in particular the Johasen and Juselius procedure, will be used to determine the degree of market integration. Some of the variables included for analysis are time series of wholesale pork price, the Mexican CPI, and the cash and futures prices of lean hogs. This research will be useful for helping pork producers and government policy makers observe the spatial behavior of the pork market prices and try to determine adequate agricultural policies in Mexico.

John Shaffer
Ph.D. candidate
University of Illinois
Urbana, Illinois

Option prices are unique because they give additional information beyond expectations about the level of futures prices generated in future markets. Because option prices are derivatives via a future price distribution, uncertainty can be depicted through the higher moments of this contribution, called implied volatility. Examined here are option valuation and the informational content of options prices on futures for corn, soybean, hogs, and the S&P 500 index. The research will be in three primary areas: 1) using different option pricing models to examine informational issues, including such topics as the effects of parametrization, model type, estimation criterion, and solution algorithm on option prices; 2) and examination of the term structure of option volatility through time; and 3) an examination of the behavior of uncertainty relative to informational releases.