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Freshly Squeezed Evidence from the OJ Market

By Jacob Boudoukh, Matthew Richardson, Yuqing Shen, Robert F. Whitelaw, Jacob Boudoukh, A Matthew Richardson, B Yuqing Shen C and Robert F. Whitelaw B

Abstract

rwhitela@stern.nyu.edu. Do Asset Prices Reflect Fundamentals? Freshly Squeezed Evidence from the OJ Market 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. This paper reexamines the relation between FCOJ futures returns and fundamentals, focusing primarily on temperature. We show that when theory clearly identifies the fundamental, i.e., at temperatures close to or below freezing, there is a close link between FCOJ prices and that fundamental. Using a simple, theoretically-motivated, nonlinear, state dependent model of the relation between FCOJ returns and temperature, we can explain approximately 50 % of the return variation. This is important because while only 4.5 % of the days in winter coincide with freezing temperatures, two-thirds of the entire winter return variability occurs on these days. Moreover, when theory suggests no such relation, i.e., at most temperature levels, we show empirically that none exists. The fact tha

Year: 2003
OAI identifier: oai:CiteSeerX.psu:10.1.1.199.6842
Provided by: CiteSeerX
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