The systematic downward bias in live cattle futures: A further evaluation

✍ Scribed by Darwin M. Pluhar; Carl E. Shafer; Thomas L. Sporleder

• Publisher: John Wiley and Sons
• Year: 1985
• Tongue: English
• Weight: 486 KB
• Volume: 5
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990050103

✦ Synopsis

In the 1981 study, Helmuth found that the futures price dropped within a short period of time when the live cattle futures price equaled or exceeded the USDA reported Corn Belt cost of feeding plus a Midwestern basis adjustment (Staff, 1981). Simulated trading with this indicator was successful all 29 times that the futures price reached the signal level over the January 1978-January 1981 period (Staff, 1981). This technical device's ability to indicate certain drops in live cattle futures prices with 100-percent accuracy was interpreted as evidence that the live cattle futures market was not efficient (Helmuth, 1981, p. 347) ' Further, Helmuth (1981, p. 347) alleged that 32 traders had made disproportionate profits by manipulating the futures market with the technique.

Helmuth's reports spawned special investigations by the Commodity Futures Trading Commission (1982a, 1982b), the National Cattlemen's Association (1982), and Palme and Graham (1981). These studies were primarily concerned with the allegation that 32 traders had acted in concert and less with the trading technique.

'According to the theory of efficient markets, based on the concept of perfect competition and the conclusion that price changes follow a random walk, a mechanical trading technique which predicts Futures price changes with accuracy should not be possible when the market is efficient (Helmuth, 1981, p. 347;Mann and Heifner, 1976).