Chapter 20. Commodity Futures: Orange Juice and Sentiment

Author: Shefrin, Hersh

Source: Beyond Greed and Fear, October 2002 , pp. 289-299(11)

Publisher: Oxford Scholarship Online Monographs

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Abstract:

From the perspective of market efficiency, the question about volatility in commodity prices boils down to whether commodity prices overreact to the flow of new material information. From the outside, it is often difficult to judge how material the flow of information actually is. However, there is one commodity market where it is relatively easy to evaluate those information flows. That commodity is orange juice concentrate, where the most relevant fundamental variables that change on a day-to-day basis are the weather around Orlando, Florida and the supply of oranges from Brazil. The bottom line is that heuristic-driven bias by these traders causes the prices of orange juice concentrate to be excessively volatile relative to the underlying fundamentals. In other words, sentiment impacts the market for concentrate. Usually, excess volatility is a manifestation of trader overreaction, either to news that has occurred, or to the absence of news altogether.

Keywords: Florida; Brazil; sentiment; volatility; Orange juice; weather

Document Type: Research article

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