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European Review of Agriculture Economics Vol 29 (1) (2002) pp.67-84
© 2002 Oxford University Press and the Foundation for the European Review of Agricultural Economics

Identification by full adjustment: evidence from the relationship between futures and spot prices

W. Erno Kuiper, Joost M. E. Pennings, and Matthew T. G. Meulenberg

Wageningen University, Wageningen, The Netherlands
University of Illinois at Urbana–Champaign, Urbana–Champaign, IL, USA

Summary

This paper proposes a test for orthogonality of the errors in a vector error-correction model (VECM) that focuses on the recursive ordering among the contemporaneously correlated errors. The test is based on the fact that when the frequency of the data is sufficiently low one of the variables in the long-run equilibrium relationship adjusts fully within the same period to its new equilibrium level. An empirical investigation of the relationship between spot and futures prices for commodities traded on the Amsterdam Exchanges and the Chicago Board of Trade reveals that the spot price adjusts fully to its new equilibrium level if the price-discovery function of the futures market works well.

Keywords: cointegration, exogeneity, long-run causality, spot–futures price relationship, price discovery


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