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Do Asset Prices Reflect Fundamentals? Freshly Squeezed Evidence from the OJ Market

Authors: Boudoukh, Jacob
Richardson, Matthew
Shen, YuQing
Whitelaw, Robert F.
Issue Date: 6-Apr-2005
Series/Report no.: S-DRP-03-05
Abstract: The behavioral finance literature cites the frozen concentrated orange juice (FCOJ) futures market as a prominent example of the failure of prices to reflect fundamentals. In contrast, we show that when theory clearly identifies the fundamental, e.g.,temperatures close to or below freezing, there is a close link between FCOJ prices and that fundamental. Using a simple, theoreticallymotivated, nonlinear, state dependent model, we can explain approximately 50% of the return variation on days with freezing temperatures. Moreover, while these observations represent less than 4.5% of the winter sample, they account for two-thirds of the entire winter return variability.
Appears in Collections:Derivatives Research

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