In the case of futures and cash prices, when they deviate substantially, a point of disequilibrium will eventually be reached where producers, processors, and/or speculators are motivated by profit opportunities to buy or sell one or both of the assets; by doing so, the two prices would converge towards their long-run equilibrium.
If the test confirms that futures prices and cash prices are not stationary, and that the first difference of each individual series is stationary, then the time series are integrated of order 1 (I(1)), and we then choose Johansen's methodology to test cointegration.
The cash prices used here are NGM soybean prices from ZGWM and include weekly average data from March 2003 to January 2010.
We begin with a descriptive analysis of the relationship implied by Equation (i) using data on futures and cash prices from 2003 to 20i0.
As indicated earlier, if futures prices and cash prices converge, then the estimated values for (30 and b1 should be zero and unity.
Our results showed that the cash prices and the lagged futures prices one week and one to six months prior contained unit roots.
Our results suggest that futures prices taken at one week, or one to six months prior to cash prices are cointegrated with the upcoming ZGWM average cash prices at a statistically significantly level ([alpha] = 0.
Having established that the DCE futures prices are cointegrated with ZGWM local cash prices, we turned to test the long-run coefficients, [beta]', to examine whether each futures price series could form a long-run relationship with the later revealed cash prices (Equation (5)).
Both independent test and joint tests showed that the null hypothesis could not be rejected at a 5 per cent level for the one-week lag estimation, indicating that there is no bias between futures prices and cash prices in the short term.
Using sample data from 2003 to 2010, we detected that futures prices taken one to six months prior to cash prices responded rapidly to exogenous price shocks with a magnitude of adjustment of more than 49 per cent of the previous month's equilibrium error.
57) Our results revealed that the efficiency of soybean trading has improved in recent years and that the futures prices provide useful signals to the formation of forthcoming cash prices.
