Empirical Application to Live Sample Clauses

Empirical Application to Live. Cattle Futures‌ This section describes the application of our methods to live cattle futures. Using the existing live cattle futures contract, I derive the term structure for a boxed beef cutout value futures contract and generate futures prices for that hypothetical contract. Next I use regression methods to determine optimal hedge ratios for various hedging scenarios using both the live cattle futures contract and the derived BBCV futures contract as hedging tools. I employ two regression methods to estimate optimal hedge ratios. In the following notation, Xxxxx and Futurest are the log spot price and the log futures price, respectively. First, I test the data for stationarity. Next, I regress log spot prices on log futures prices using ordinary least squares (OLS) estimation. An augmented Xxxxxx- Xxxxxx test (as shown in section 4.3) is used to determine whether the data is stationary. The regression equation is: Xxxxx =  + Futurest + t (4.4.2) where Xxxxx = Xxxxx − Xxxxx −1 and Futurest = Futurest − Futurest −1 . The estimated slope coefficient ˆ represents the optimal hedge ratio. If spot and futures prices are cointegrated, the OLS estimates of the optimal hedge ratio can be biased because they do not account for the long term relationship between the prices. I test for cointegration between prices using the Xxxxx and Xxxxxxx (1987) two step procedure (as shown in section 4.3). The error correction model is: p q Xxxxx =  ut −1 + Futurest + i Xxxxx −1 +  j Futurest −1 + t
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