[lbo-talk] Markets and the tooth fairy - Orange juice futures

[Christian Gregory]

>The OJ futures study was done by the economist Richard Roll. (The article's
in the December 1984 issue of the AER, pp. 861-880.) He looked at the
Florida futures market between 1975 and 1981. What he found was that if you
looked at the change in the price of OJ futures on a given day, it would
effectively predict the error in the National Weather Service's forecast for
the following evening and early morning. In other words, if OJ futures fell,
then the evening's weather was consistently warmer than the Weather Service
predicted. If OJ futures rose, then the evening's weather was consistently
colder. (Cold weather makes OJ futures more valuable, and warm weather makes
them less.)

How well was the movement of futures prices correlated to things like the
price of oil? Warmer weather would also mean lower oil prices, other things
equal (especially in winter), which could explain some of the price
movement.

Also, "predicting" the error in the Weather Service forecast isn't the same
as predicting the weather. The difference in temperature between, say 68 and
70, while possibly statistically relevant to some kind of regression model,
would not necessarily be relevant to the actual condition of orange
production, right?

Christian