Marin Bozic

My name is Marin Bozic. I am an Assistant Professor in Dairy Foods Marketing Economics in the Department of Applied Economics at the University of Minnesota.

I am affiliated with The Midwest Dairy Foods Research Center, one of six national dairy centers whose mission is to develop and transfer new knowledge in dairy foods research that will increase the value of dairy products in the U.S. and ensure its future competitiveness. The Center was established as a partnership among the University of Minnesota, South Dakota State University, and Iowa State University. Research is done in collaboration with academia and industry, both nationally and internationally.

This is a newly created faculty position created to foster research in areas such as (i) evaluation of the economic value of new product development, (ii) elicitation of consumer preference and willingness to pay for new dairy food products, (iii) evaluation of demand and price analysis of existing and new dairy food products, (iv) assessment of the market penetration and market potential for new products, and (v) feasibility of processing investments for new product development.

The task of this essay is to examine price discovery, volatility spillovers and impacts of speculation in the dairy sector. I have developed a method that allows for the calculation of implied cheese futures prices for a period before cheese futures actually started trading. Evidence for periods when cheese futures did trade suggests that utilized approximation methods perform very well. Examining the time series properties of cheese cash and implied futures price I find that the unit root hypothesis is strongly rejected for cash prices, while unit roots cannot be rejected for nearby futures prices in the framework that carefully controls for rollovers. To explain this result, I built a model that illustrates the time series properties of the nearby futures price series for a futures contract written on a second-order stationary cash series and identified the mean-reverting nonlinear dynamics that will occur at rollovers. Given the time series properties of the cash and futures series I propose an error-correction-type model using spreads between cash and the second nearby futures instead of the cointegration vector. To account for volatility dynamics I employ the GARCH-BEKK structure. I find that the flow of information in the mean model is predominantly from futures to cash, while volatility spillovers are bidirectional. It is possible that cash prices that include unfilled bid/offers react differently to increases in volatility in futures prices than sales cash prices, though this result may not be robust and further research is needed to identify if liquidity in the cash market is reduced with increase in conditional volatility of the futures price. I propose an extension of the BEKK variance model that I refer to as GARCH-MEX. That model does not restrict the sign of the additional regressors on the conditional variances, and can easily insure positive-definiteness of the conditional covariance matrix. Utilizing that model to evaluate the impact of speculation I find strong evidence against the hypothesis that excessive speculation is increasing the conditional variance of futures prices. If anything, speculation may in fact be inadequate, and further research with daily speculative positions and high-frequency futures prices is needed to identify the effect of increased speculation on realized volatility of futures prices, bid-ask spread and magnitude of slippage.

July, 2011