T performance of the live cattle futures contract traded on the Chicago Mercantile Exchange. In his article, "A Report on the Systematic Downward %as in Live Cattle Futures Prices," Helmuth (1981) ". . . reports on the discovery of a technique which predicted certain drops in live cattle futures prices with 100-percent accuracy over the period from January 1978 through February 1981 . -. " (p. 347).
In his final section Helmuth draws strong conclusions regarding the performance of the live cattle futures contract. "Based on the theory of efficient markets, the existence of the phenomenon described in this report provides strong evidence that the live cattle futures market is not operating as an efficient price discovery mechanism and that this market is operating with a consistent, systematic, predictable downward bias. Such a conclusion means that the live cattle futures market is not fulfilling its economic purpose of providing a hedging vehicle to all producers" (p. 356). Helmuth's conclusion, and the methodology used in his study, have been ably criticized by Palme and Graham (1981), also in this journal.
Consequently, this article does not focus specifically on the claims made by Helmuth, but develops and applies a new methodology for evaluating the performance of futures prices as an aid in the process of price discovery. As will become clear, the conclusions supported by this new methodology strongly oppose Helmuth's conclusion. In fact, it appears that the live cattle futures contract has exhibited exemplary price behavior over the period examined. The next section briefly reviews some prior work on the performance of cattle futures pricing, while Section I1 presents the new methodology to be applied to the cattle futures prices. Section I11 presents the results on the price performance of the live cattle futures and Section IV interprets these results and draws implications concerning the performance of live cattle futures prices in the role of price discovery.
' Price discovery is one of the most important social functions of futures markets, in that it aids predictions of future spot prices. Black (1976) even asserts that the function of price discovery may be the most important social role of futures markets.