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

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.