Grain Futures Markets: What Have They Learned?

Taken together, studies that examine how well commodity futures markets perform find that risk premiums are common—and so unbiasedness is not—and markets are not uniformly efficient across commodities or forecast horizons. This large body of research sheds important light on whether and to what extent commodity-futures markets forecast optimally future spot prices and, so, enable commercials to manage price risk by effectively parsing out much of it to speculators, a process that improves the total welfare of an economy with competitive but otherwise-incomplete markets. Nevertheless, that speculators can, in effect, improve welfare in this way has done little to quell popular hostilities toward futures markets. Such hostilities—and, in particular, those directed at speculators—in North America date to the inception of these markets in the nineteenth century, and have contributed to the unflattering depiction of the early futures exchange as an inchoate and poorly managed institution that initially served only the (illegitimate) aspirations of gamblers, an original-sin creation narrative that surely compromises the legitimacy of modern futures markets. Unfortunately, economists’ understanding of early commodity-futures markets is particularly fragmented—the extant literature focuses almost exclusively on the post-World War II era—and, as such, claims regarding the performance of early futures markets remain largely unsubstantiated in any quantitatively measurable sense. In this paper, I test and compare the efficiency properties of wheat, corn, and oats futures prices on the Chicago Board of Trade (CBT) from 1880 to 1890 and from 1997 to 2007. I demonstrate that, on balance, these nascent nineteenth-century grain-futures markets were, like their contemporary counterparts in this case, mostly efficient. As such, these results support the claims of early proponents of futures markets who argued that the development of the futures exchange was shaped primarily by commercial interests who sought to mitigate price risk.commodities futures markets, unbiasedness, efficiency, Chicago Board of Trade, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Demand and Price Analysis, Farm Management, Financial Economics, Marketing, Research Methods/ Statistical Methods, Risk and Uncertainty,

PEER PRESSURE: REFEREED JOURNALS AND EMPIRICAL RESEARCH IN THE UNDERGRADUATE ECONOMICS CURRICULUM

Sharing with our students what we do as economists and how we do it can augment student learning in fundamental and interrelated ways. In particular, students learn to think like economists; to gain "information literacy;" to explain and synthesize their ideas clearly; and to engage themselves in the learning process. In this paper, I propose a curriculum to teach students how to access, chart and interpret macroeconomic data; to search and access peer-reviewed journal articles; and to formulate, in writing, positions on myriad economic issues, using empirical evidence and the extant academic literature to substantiate their positions. An assessment of the curriculum, which I instituted in fall 2001, demonstrated that students who participated were generally able to determine the extent of information needed to complete an empirical research prompt as well as to access and use the information effectively, efficiently and ethically. Moreover, most students could distinguish between general periodicals and scholarly journals.Teaching/Communication/Extension/Profession,

Banking and commerce: a liquidity approach

This paper looks at the advantages and disadvantages of mixing banking and commerce, using the "liquidity" approach to financial intermediation. Adding a commercial firm makes it easier for a bank to dispose of assets seized in a loan default. This "internal market" increases the liquidity of such assets and improves the bank's ability to perform financial intermediation. More generally, owning a commercial firm may act either as a substitute or a complement to commercial lending. In some cases, a bank will voluntarily refrain from making loans, choosing to become a nonbank bank in an unregulated environment.Nonbank financial institutions ; Bank liquidity

Developing and Implementing an Internet-Based Financial System Simulation Game

Thanks to the internet and server-side technology such as Active Server Pages (ASP), developing and implementing interactive pedagogy is proving quickly to be both user-friendly and relatively inexpensive, requiring of faculty and students only pedestrian programming skills and access to the internet, respectively. The Financial System Simulator (FSS), developed over a summer term, is one such example. The FSS is an internet-based, interactive teaching aid that introduces undergraduate students to the domestic and international consequences of monetary policy. While simulators are common among computer-aided interactive learning devices in today\u27s undergraduate economics curricula the FSS is unique because students, representing nations, interact with each other rather than a computer. Hence, the exercise provides users with real-time outcomes based upon their decisions, as well as the decisions of other students. According to student surveys the game helped students understand domestic and international implications of monetary policy and kept students motivated and interested throughout the learning process

Can Futures Markets Quell Money Market Volatility? A Look at US Money Markets Before and Since Commodities Futures Contracts

This paper offers the introduction of futures markets, and the resulting substitution away from consignment contracts around 1874, as the reason why early US money markets are relatively more volatile, and far less seasonal, than their post-1874 counterparts. Until 1874, movements in interest rates were erratic and financial instabilities imparted relatively large shocks to money markets, particularly in the autumn months. After 1874, the effects of financial instabilities on interest rates diminished and the regularization of seasonal movements was attained. The paper demonstrates the plausibility of this claim using the standard mean-variance framework of the spot price volatility literature, where producers and speculators are assumed risk averse and risk neutral, respectively. Results indicate that the ability to hedge in the futures markets increases the price sensitivities of aggregate supply and aggregate demand, thereby diminishing the variability of both the price level and the interest rate in the presence of supply and/or demand shocks

The Orgins of the Seasonal Cycle in 19th Century US Money Markets and the Evolution of Futures Contracts

Early scholars of aggregate fluctuations, including Jevons ( 1884) and Kemmerer ( 1910), introduced the notion that seasonal cycles were relevant to the study of other, seemingly more important, fluctuations in macroeconomic time series. Kuznets (1933) continued this approach, recognizing the tendency for seasonal variations to exacerbate the variability of employment and capital accumulation. But, as economic contractions intensified in the J 930\u27s, economists began to discount the relative importance of the seasonal cycle. Work by Mitchell (1927), Pigou (I 929) and later, Burns and Mitchell ( 194 7), promulgated the view that fluctuations in commercial activity were relevant to the study of business cycles, while seasonal fluctuations were not. Currently, economists are calling for the reinterpretation of seasonal fluctuations as a means to understanding business cycles.2 As Miron ( 1996) explains, seasonal fluctuations account for a large portion of the overall movement in macroeconomic time series, and may be related to the behavior of non-seasonal (business) cycles. Moreover, to the extent that seasonal cycles are not Pareto Optimal, understanding how monetary and fiscal policy decisions can eliminate them may prove useful. While promising, the efficacy of such an approach is limited ultimately by economists\u27 understanding of the seasonal cycle. Hence, in order to add to our knowledge of business cycles, the complexities of US seasonal cycles must be unraveled. One such example, for which numerous studies have been written, is the cessation of seasonal pressures on US money markets in 1914.3 While the disappearance of seasonal variations in US interest rates is compelling simply because it challenges our intuition that seasonal cycles are endemic fixtures of US money markets, the implications of this episode are all the more pressing in light of the recent literature linking seasonal and business cycles. In this paper we examine the origins of the seasonal cycle in US interest rates, beginning in the antebellum period, in order to gain a better understanding of when and why seasonal pressures emerged (and perhaps, disappeared) in early US financial markets. Seasonal tests indicate that variations in short- term interest rates are relatively unexplained by the seasonal cycle prior to the mid-1870s, and hence, are similar to their post-1914 counterparts. We propose that the absence of a seasonal cycle prior to the l 870\u27s was most likely due to money market volatility. Prior to 1874, movements in interest rates were erratic and financial instabilities imparted relatively large shocks to money markets, particularly in the autumn months. After 1874, the effects of financial instabilities on interest rates diminished and the regularization of seasonal movements was attained. We attribute this change in behavior of short-term rates in the nineteenth century to the following institutional innovation: the introduction of futures markets and the resulting substitution away from consignment contracts in the agricultural trade shortly after 1874. The US experience with interest rate seasonals questions the view that seasonal cycles are a welldefined and predictable phenomenon in macroeconomic time series. Like business cycles, seasonal cycles can exhibit irregularities, as exemplified by their absence prior to 1874, as well as after 1914, and hence should not be dismissed as uninteresting fluctuations. Moreover, that a financial innovation contributed to the regularization of seasonal cycles in 1874 is particularly compelling, given the recent connection drawn between seasonal and business cycles, insofar as it suggests that business cycles may also be regularized by economic innovations

The Euro: Ready or Not? A Retrospective on European Unification: Some Lessons for 1999

On January 1, 1999, fifteen independent nation-states of Europe are set to relinquish their national currencies in favor of a single European monetary unit, called the euro. While the origins of the European Union (EU) (formerly referred to as the European Community) date back to the Marshall Plan, the inception of the euro occurred in February of 1992 with the passage of the Treaty on European Union, or Maastricht Treaty. Though the prospect of a European Monetary Union (EMU) has attracted many observers from the economics, finance, and business communities, the history of the EU, and its current plan to adopt a single currency, is well worth the attention of everyone. single European currency will make the EU - which overpowers the US in both production and population - more competitive by: reducing the transactions costs of exchanging currencies, allocating resources more efficiently through the elimination of exchange rate risk and maintaining a more stable price level (Eichengreen 1992: 4). Hence, the EU threatens the US\u27 s dominance as a world economic power. Nonetheless, with less than one year to go before the scheduled start date of the European Monetary Union, questions remain on whether or not the 15 member economies are sufficiently similar to warrant a single currency between them. Indeed, an examination of data on each of the 15 member states suggests that the transition to a single currency will be difficult for some and nearly impossible for others. This finding is particularly disconcerting in light of the potential destabilizing effects that failure of the EMU can have on European as well as other economies. Thus, the nation-states of Europe must proceed with caution