Teaching Begins Early This Fall: News, Efficient Markets Hypothesis, Asset Prices


Figure 1: September 2019 corn futures, accessed 8/13/2019. Source: Barchart.com.

Reader CoRev apparently cannot read an article on “event studies” and understand it. CoRev writes:

Which small window and which news takes preference over this past year+? ” As usual, you have missed the point of the discussion, which are event studies, for which we look at a small window around arrival of news…” Continuing to act as if only a singular eventis the cause of the price changes defies Fama.

He asks for an example. The above — the release of the USDA’s WASDE August report — is the event. Are all WASDE’s news? No; it’s if there is new information:

Corn futures are 5 to 15 cents per bushel lower in the aftermath of the Monday USDA data dump. They were limit down on Monday as USDA’s crop estimate was much different than trade estimates.

You can spot the impact in the graph. Of course, I’ve been trying to teach CoRev since last June, as in this soybean futures application.

 

45 thoughts on “Teaching Begins Early This Fall: News, Efficient Markets Hypothesis, Asset Prices

  1. pgl

    CoRev was trying to defend Bruce Hall’s utter confusion. Note he earlier wrote this gibberish:

    “CoRevAugust 12, 2019 at 12:06 pm
    Wow! baffled and pgl do not understand pricing, human psychology nor Fama. Just when did you expect to see the 2019 ASF infection to be impounded into futures prices? July 2018???? Or for that matter, when will the 2019 weather during planting be finally impounded? 2017-20XX???? Or are the tariff negotiations over? When do you expect to see their impacts FINALLY impounded in soybean prices?
    As pgl asks: “This is your explanation for an event that occurred a YEAR earlier. ” Or phrased differently, is a year+ old event ever superseded or compounded by later events? Which of these 3 events caused he greatest price changes? In the event study(s) have all three events been considered?”

    The only person who understood what Fama wrote back in 1970 is CoRev? Seriously! Something that happened this summer was supposed to affect future prices back in July 2018? Now we all wish we had such crystal balls as if we did, we could all beat the market!

    Permit me to write CoRev’s infamous sentence with the correct spacing:

    “Continuing to act as if only a singular event is the cause of the price changes defies Fama.”

    Lord have mercy – I need to apologize for asking Bruce Hall to take an economics class from CoRev as CoRev does not even get the basics. CoRev claims he has read Fama but CLEARLY he has not.

    Reply
      1. pgl

        Maybe we should be telling CoRev to read John Muth. I’m sure Fama did. Why? Well Thomas Sargent gets it:

        https://www.econlib.org/library/Enc/RationalExpectations.html

        The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. He used the term to describe the many economic situations in which the outcome depends partly on what people expect to happen. The price of an agricultural commodity, for example, depends on how many acres farmers plant, which in turn depends on the price farmers expect to realize when they harvest and sell their crops. As another example, the value of a currency and its rate of depreciation depend partly on what people expect that rate of depreciation to be. That is because people rush to desert a currency that they expect to lose value, thereby contributing to its loss in value. Similarly, the price of a stock or bond depends partly on what prospective buyers and sellers believe it will be in the future…Economists who believe in rational expectations base their belief on the standard economic assumption that people behave in ways that maximize their utility (their enjoyment of life) or profits. Economists have used the concept of rational expectations to understand a variety of situations in which speculation about the future is a crucial factor in determining current action. Rational expectations is a building block for the “random walk” or “efficient markets” theory of securities prices, the theory of the dynamics of hyperinflations, the “permanent income” and “life-cycle” theories of consumption, and the design of economic stabilization policies. One of the earliest and most striking applications of the concept of rational expectations is the efficient markets theory of asset prices. A sequence of observations on a variable (such as daily stock prices) is said to follow a random walk if the current value gives the best possible prediction of future values. The efficient markets theory of stock prices uses the concept of rational expectations to reach the conclusion that, when properly adjusted for discounting and dividends, stock price changes follow a random walk. The chain of reasoning goes as follows. In their efforts to forecast prices, investors comb all sources of information (see INFORMATION AND PRICES), including patterns that they can spot in past price movements. Investors buy stocks they expect to have a higher-than-average return and sell those they expect to have lower returns. When they do so, they bid up the prices of stocks expected to have higher-than-average returns and drive down the prices of those expected to have lower-than-average returns. The prices of the stocks adjust until the expected returns, adjusted for risk, are equal for all stocks. Equalization of expected returns means that investors’ forecasts become built into or reflected in the prices of stocks. More precisely, it means that stock prices change so that after an adjustment to reflect dividends, the time value of money, and differential risk, they equal the market’s best forecast of the future price. Therefore, the only factors that can change stock prices are random factors that could not be known in advance. Thus, changes in stock prices follow a random walk.”

        Muth almost 60 years ago applied his thinking to agricultural markets. He would certainly appreciate Menzie’s posts and I’m sure if he read the utter gibberish from CoRev – he would immediately declare CoRev to be the dumbest person ever.

        Reply
      2. pgl

        This post had the following:

        “September 2019 corn futures, accessed 8/13/2019. Source: Barchart.com.”

        Got that? Corn. And CoRev goes off about soybean prices! Go figure!

        Reply
    1. pgl

      The BBC story:

      https://www.bbc.com/news/business-49287494

      Trump delays some tariffs on Chinese imports

      ‘The US is delaying imposing tariffs on some imports from China until 15 December because of “health, safety, national security and other factors”.
      The products include mobile phones, laptops, video game consoles, some toys, computer monitors, and certain footwear and clothing. The surprise news from the United States Trade Representative office sparked a 5% jump in Apple shares. Other items facing a 10% tariff will go ahead as planned on 1 September. US President Donald Trump, speaking to reporters, said that the delay was in part to avoid hitting US shoppers this Christmas.’

      Health, safety, national security, or simply Merry Christmas? Could the White House make up its damn mind what its excuse for Trump wimping out again?

      Reply
      1. The Rage

        Even those “tariffs” are overrated. UK default and corporate junk bond bust should be the on the leading economic news right now with the latter even more important. I see UK default as instant global recession as banks are forced to write down losses from the default slowing credit growth…………I have the US taking a 1% nominal contraction alone from these large write downs.

        Ag is gonna have to cut production. I suspect the economy ex-farm is likely going to contract again and no, its not all Trump’s fault unless they did it for the “Republican President”. It didn’t correct the total is should have and instead tried to steady production in a sea of overcapacity. We see this in the entire economy in 2017-18 and it was a big mistake. It blew the junk bond bubble to frouth to outright bubble. Now they are paying the price. Auto and energy extraction………..overcapacity……….overcapacity……….overcapacity. No Full Employment either. Sad.

        Reply
        1. pgl

          Lord – all of your comments are pure word salad gibberish. Please either learn to make a coherent point some day or just go away.

          Reply
  2. CoRev

    As Menzie says: “I’ve been trying to teach CoRev since last June,..”, and i have been trying to understand the single minded attention of the Chinese tariff’s impacts on SOYBEANS since that time. Why? Because two major events have since ensued; 1) outbreak of the African Swine Flu in the Chinese and other hog herds, dramatically lowering China’s demand for soybeans as hog feed, and 2) the exceptionally poor US weather during SOYBEAN planting season.

    Were these offsetting leaving just the tariffs to effect prices? Doubtful, but if you read just Menzie’s analysis, it must be so.

    Furthermore, why did Menzie switch from soybeans to corn in this latest article? They are neither the same crop nor used the same way, especially by China’s hog farmers.

    If the event is the issuance of his referenced article, then why did he show such a short 5 day data sample in his chart? If we widen just a few years we find his dramatic price change is from a previous high: https://www.macrotrends.net/2532/corn-prices-historical-chart-data or using his Barchart source:

    Was there any information in his Barchart reference that could have caused caused the sudden rice drop from its previous high? Why yes, “…NASS also raised yield by 3.5 bpa to 169.5 bpa, which took production to 13.901 bbu, up 26 mbu from July. Analysts were expecting a ~700 mbu drop. Old crop US carryout was raised by 20 mbu to 2.36 bbu, with new crop up 171 mbu to 2.181 bbu…” Raising the production estimates from a previous LOW ESTIMATE should have lowered the prices. Voila, Menzie’s chart.

    Harvest season should start in just a few weeks. Then we will see even more price swings as the numbers change from estimates to actual production amounts. It is clear from the August USDA report this year will be a down year for soybean production. if you need confirmation look at the “Soybeans Setting Pods –Selected States” chart here: https://downloads.usda.library.cornell.edu/usda-esmis/files/8336h188j/xg94j177z/m900p5983/prog3319.pdf 2019 is down 22% from the 2014-2018 Average. That is a late developing crop in a year with lower acres planted.

    As I’ve said in the past, hope that we DO NOT have an early onset of colder weather to further reduce production numbers.

    Farming is always all about the weather! We’ll have to see what meat prices are late this year and next.

    Reply
      1. CoRev

        Menzie, we surely did have market moving news, an new estimate of INCREASED CORN production. Just as we had in the past couple of reporting cycles which caused the high. We also had a slight change in the soybean messmate.

        What is so different to cause another poorly formed event study? There is no mystery here. Production estimates go up and prices go back down to where they have been for the past several years.

        Maybe pgl can give us another lecture on how supply and demand work and their effect on prices. The only person who thinks he understands them is pgl. At least he quotes them often enough.

        Reply
      2. CoRev

        Menzie, we surely did have market moving news, a new estimate of INCREASED CORN production. Just as we had opposing estimates in the past couple of reporting cycles which caused the high. We also had a slight change in the soybean estimate.

        What is so different to cause another poorly formed event study? There is no mystery here. Production estimates go up and prices go back down. In this example back to where they have been for the past several years. Fama is proven again correct. /sarc If it didn’t happen everyday would prices change? /sarc

        Maybe pgl can give us another lecture on how supply and demand work and their effect on prices. The only person who thinks he understands them is pgl. At least he quotes them often enough.

        Farming is always all about the weather!

        Reply
          1. CoRev

            Menzie, from the beginning of this series I admitted admitted tariffs were also important, but they were not the singular cause for price changes, especially over an extended year+ period.

            An event study should look beyond just the event to determine the validity of the event’s impact, not just the coincidence that prices changed after occurrence. In the corn example, what was the new information? It was a reversal of production estimates effecting supply.

          1. CoRev

            Pgl, please, please rad a farming book to understand this: “It was a reversal of production estimates effecting supply.” is the opposite of your understanding: “BAD weather increased corn production????” Yep – you are an IDIOT!

          2. Menzie Chinn Post author

            CoRev: Bad weather defined as reducing output typically results in higher prices, ceteris paribus. That’s what pgl has been consistently writing, while you have not. Do you really want me to dig up all your comments that verify your confusion (or at least confused writing)? Say yea or nay.

          3. CoRev

            Menzie, do you forget my original comment and position well over a year ago? Do you deny Farming is always all about the weather! as does pgl?

          4. 2slugbaits

            CoRev What specific news event on or around noon on Monday (12 Aug) do you believe caused the sharp drop in corn prices? In other words, what specific fact noted in the WASDE report was responsible for the 30 cent per bushel price drop?

          5. CoRev

            2salugs, Menzie, and pgl, the news was: “It was a reversal of production estimates effecting supply.” As Menzie accurately pointed out: “Bad weather defined as reducing output typically results in higher prices, ceteris paribus. “, None of you have understood what the new estimate reversal was. Had you just thought instead of emoting when trying to score points, you might have correctly concluded what that reversal was,. Here’s a hint – look at yield.

            Please read a farming book to understand what this means: “…NASS also raised yield by 3.5 bpa to 169.5 bpa, which took production to 13.901 bbu, up 26 mbu from July. Analysts were expecting a ~700 mbu drop….” Menzie’s own reference – https://www.barchart.com/story/futures/quotes/ZCU19/overview/3492551/corn-market-on-session-lows-as-sell-off-continues

    1. pgl

      “Farming is always all about the weather! ”

      And bad weather shifts the supply curve inwards. If you think this is why prices fell – you are dumber than anyone us could ever imagine. I just put up a tribute to John Muth and the concept of Rational Expectations. Of course we know you will never read it even if Muth back in the early 1960’s was talking about agricultural economics.

      Reply
      1. CoRev

        Pgl, please read a book on farming. “And bad weather shifts the supply curve inwards.” was not the message of the report. You didn’t understand the fundamental message, that production was UP of the report.

        I know your ignorance and laziness causes you to misinterpret data: “…NASS also raised yield by 3.5 bpa to 169.5 bpa, which took production to 13.901 bbu, up 26 mbu from July. …”
        After saying this:
        “…The USDA report showed planted acreage down 1.7 million acres from July at 90.005 million acres with harvested acreage at 82.017 mac (down 1.6 mac). …”

        To translate that for you, less total acreage planted is resulting in increased total yield estimates. Do you understand the impact on the supply curve? Your comment shows otherwise. Was it due to your laziness in not reading the link or your ignorance of its meaning?

        Farming is always all about the weather!

        Reply
        1. pgl

          Have you read Fama (1970)? Clearly not. Or the seminal papers by John Muth? Oh wait – you have no clue who Muth was. Or what Rational Expectations is. In fact, you have no clue what even a basic supply and demand model looks like.

          But you want me to read a book on farming? Seriously? I’m Irish and my family has had a long history of farming, which of course was profitable enough to send me to graduate school in economics.

          Basic economics? Muthian Rational Expectations? Fama (1970)? All critical concepts everyone else here knows and every lease here knows you have no clue what any of this is about.

          Reply
        2. pgl

          “To translate that for you, less total acreage planted is resulting in increased total yield estimates. Do you understand the impact on the supply curve?”

          I see – now you say the supply curve has shifted out. OK! You’ve dropped your stupid BAD weather story and finally decided after flip flopping many times to put forth something that might predict lower prices. But wait U.S. production has declined by 8%. So which is it IDIOT? Bad weather and an inward shift of the US supply curve or increased yields and an outward shift of the US supply curve.

          No – you are so utterly confused that you have no clue what your little “thesis” is. Troll on!

          Reply
          1. CoRev

            Pgl, your understanding of the subject, farming, is what causing your perception of flip flopping. I ahve to repeat over and over to get you r even begin to understand 5he basics. Above is even another example. ME: “To translate that for you, less total acreage planted is resulting in increased total yield estimates. Do you understand the impact on the supply curve?”
            YOU: “I see – now you say the supply curve has shifted out. OK! You’ve dropped your stupid BAD weather story…Bad weather and an inward shift of the US supply curve or increased yields and an outward shift of the US supply curve.”

            1st, that’s what the Report said, not me.
            2nd, I asked you to read a farming book to learns basic terms such as yield.
            3rd, reduced planted acreage and increased yield from them is caused by a change in ?????

            To date, you have shown no ability to use logic to work through to get that answer of what is the most important cause in crop yields between planting and harvest. Here’s a hint for the most often cited cause, is beneficial wea-her change. Reading a farming book and using that new knowledge would allow you to add that missing letter. What this year has shown is the weather is also really important during the planting season.

            Let’s hope we have good weather during harvest to so as not to compound some of the planting season poor weather. Reading a farming book will help you understand this.

            “No – you are so utterly confused that you have no clue what your little “thesis” is. Troll on!”

        3. pgl

          Poor CoRev cannot even read USDA reports even as he lectures the rest of us for not doing so:

          https://release.nass.usda.gov/reports/crop0819.pdf

          “Corn Production Down 4 Percent from 2018
          Soybean Production Down 19 Percent from 2018”

          My U.S. soybean production has declined even more than I earlier suggested. But wait – corn production is somewhat lower. So why the price decline that Menzie noted:

          https://www.upi.com/Top_News/US/2019/08/12/Corn-prices-dive-as-USDA-predictions-show-increase-in-fall-yields/8041565638084/

          “The price for corn tumbled Monday afternoon after the U.S. Department of Agriculture released its latest crop estimates, showing farmers have planted far more acres this year than private analysts anticipated.”

          Expectations! The market was predicting a far greater decline than we saw. Now John Muth’s Rational Expectations papers might shed some insights here but of course CoRev has not read those either!

          Reply
          1. Menzie Chinn Post author

            pgl: We shouldn’t be too hard on CoRev. If he still hasn’t understood Fama, how can he be expected to understand “news”, “surprises”, etc. I guess it’s too difficult for him to pick up a textbook — to the extent that it would disturb his worldview. Rather pathetic.

          2. CoRev

            You guys need to stop digging. Pgl even quoted the important information witho9uf understanding i: “Expectations! The market was predicting a far greater decline than we saw.” Fama is not proud of you.

          3. baffling

            corev has backed himself into a self defeating corner. when all of this started, it was because soybean prices were expected to drop, as evidenced by futures prices. at that point, menzie argued the issue driving down those prices was trump trade policy. accepting that as true would emasculate trump and his supporters, showing them as weak and wrong. therefore, there must exist something else that drove down those prices, because it could not be dear leaders fault. and this is what has led to corev flailing at odd defenses, such as poor weather driving down prices or swine flu one year later affecting the futures prices presented a year earlier. the only way corev can present himself with a coherent argument is to present the truth-trump trade policy is killing the american farmer. but he cannot admit defeat, so instead we get stoooopidity.

          4. CoRev

            Baffled, my statement: ”
            CoRev
            June 13, 2018 at 2:30 pm

            Menzie, please quit mis-applying Economics issues over agricultural or any other industry. Instead of what would be the profits that might have been have been provided the world market wasn’t perturbed by weather. I’m surprised someone from the Upper Midwest doesn’t realize the basics of Ag pricing. Tariffs or other trade barriers/restrictions only are part of what makes up the price. As an economist you are ignoring annual supply and demand. …”

            Since then we seen an ASF infection in China driving down China’s demand, and bad weather in the 2019 soybean US planting season driving down estimates of yield and total production. All three effect prices, NOT JUST ONE.

            For the corn example in this article, yield and production estimates were raised from prior reports causing a change in futures prices.

            Troll on! Continue to show us your ignorance.

          5. baffling

            “Since then we seen an ASF infection in China driving down China’s demand, and bad weather in the 2019 soybean US planting season driving down estimates of yield and total production. All three effect prices, NOT JUST ONE.”
            none of this changes the fact that you argued in summer 2018 soybean prices would recover to preseason levels once your infallible leader beat up the chinese in the trade war. it would be quick and decisive, because the man had a plan. menzies use of futures to anticipate price was useless, in your opinion. lower soybeans due to tariffs and trade wars were simply the short term pain before the winning resumed. and we are still waiting for the winning to resume. but since then, corev the fearless has added the additional excuses such as asf and bad weather. rather than admit the trade war has been a disaster for us farmers. menzie was correct and corev was wrong. please repeat that over and over corev, eventually it will sink in.

          6. CoRev

            Baffled, again forget the conditional, if trade negotiations end, associated with the guess last year.

            you also misunderstand history: “but since then, corev the fearless has added the additional excuses such as asf and bad weather.” I didn’t add nor cause those EVENTS. They occurred and effected prices naturally. It’s how markets reflect change.

            Troll on! Continue to show us your ignorance.

          7. Baffling

            Corev it was not a guess that the trade war would end last year. It was an assertion on your part, in deference to your fearless leaders negotiating skills. And it was wrong, as was trumps tremendous trade policy strategy. This whole convoluted discussion originates from your incorrect assumption and failure to recognize a glaring mistake. Instead you keep digging a deeper hole.

    1. CoRev

      Pgl, please learn something about ag. commodities and supply and demand. Reading and UNDERSTANDING them is fundamental to commenting. You’ve failed miserably. Showing your ignorance. Again.

      Reply
      1. pgl

        Oh gee – a confused village idiot who cannot keep straight whether he thinks the supply curve has moved inwards or moved outwards thinks he is going to MANSPLAIN economics to me. Falling on the floor laughing!

        Reply
  3. Julian Silk

    Dear Menzie,

    This will just be a general question, and maybe it can answer a little bit of the controversy. Could you repost the site for the event study you recommended to AS, and also information on the pluses and minuses of event studies in general? I don’t know about AS, but I would be very interested in the theories behind the event studies, so that the events couldn’t just be dismissed as random events according to the theory, and also about the econometric packages used to estimate the events.

    Julian

    Reply
    1. AS

      Julian,
      Here is the link to the prior post in which event studies were discussed http://econbrowser.com/archives/2019/08/prospects-for-a-resolution-to-the-us-trade-dispute-inferred-from-soybean-futures#comments
      Here is Professor Chinn’s link for a specific article: https://www.econstor.eu/bitstream/10419/81965/1/wp-99-09.pdf
      If you have access to the SAS software linked below as described by 2Slugs, I have a sense that intervention or event models may be reasonable to derive. 2Slugs’ comments are shown below.
      “But…SAS also has a much simpler GUI version (called Forecast Studio) that is more along the lines of EViews.
      https://support.sas.com/rnd/app/forecast-server/PDFs/forecast_studio_inside.pdf
      Go to page 4 to see how Forecast Studio handles event analysis.”
      Today in the WSJ (August 15, 2019, page B10), there is an excellent article on the price of ethanol futures sinking to a five year low, since certain small refineries may now be exempted from blending ethanol with diesel and gasoline. The percentage price drop in corn and ethanol since May 2019 are almost identical.
      As I mentioned in a prior post, a text I have found that discusses intervention models, is, “Forecasting Time Series, and Regression, 4th ed.” Bowerman, O’Connell, Koehler. The authors discuss a Cincinnati Bell Telephone intervention model and provide the data. The authors used SAS software. I contacted one of the authors to see if an EViews solution had been developed. No EViews solution was developed.

      Reply
  4. pgl

    “An event study should look beyond just the event to determine the validity of the event’s impact, not just the coincidence that prices changed after occurrence. In the corn example, what was the new information? It was a reversal of production estimates effecting supply.”

    CoRev at 5:02AM. Two sentences that each show CoRev is truly a village idiot.

    “Look beyond just the event to determine the validity of the event’s impact”? John Muth is rolling in his grave laughing at this incredibly stupid statement. Rational expectations is based on all available information at the time. The news of the day (the event) would encompass any new information that became available for the first time on that day. If the only news was some policy event (tariff) that is your events study. Nothing else. Now if we had on the same day some surprise information from say WEATHER then great. But there was no such news during the events Menzie has explored. But all of this is over CoRev’s pathetically stupid brain as he has neither read Fama nor Muth.

    Onto sentence two – WTF does “reversal of production” even mean? CoRev has no clue. Look – the news in the corn report was that production was HIGHER than markets has expected (oh wait – expectations as in Muth so we have already lost the village idiot CoRev). So it is not a “reversal of production” but an unexpected increase in supply that lowered prices.

    CoRev does not know what any of these basic economic concepts even are so he writes this babbling WORD SALAD with terms that even CoRev does not understand what CoRev writes!

    Reply
    1. CoRev

      Pgl, all this blaming because you think I misunderstood, but it is you who is totally confused. You even listed the reason prices dropped: “Look – the news in the corn report was that production was HIGHER than markets has expected…” Let me repeat one of my earlier comments: “Pgl, please read a book on farming. “And bad weather shifts the supply curve inwards.” was not the message of the report. You didn’t understand the fundamental message, that production was UP of the report.

      Now we could add “estimate” to that sentence, but if you had understood the report and or farming, you’d know we are still BEFORE 2019/210 harvest and that nearly everything was estimates.

      Please read farming book.

      Reply
      1. pgl

        This is from the idiot who babbled about soybean prices when the topic was corn. BTW – you claimed corn production increased. Of course you did not provide a link to the oilseeds report. I did. And it noted corn production fell by 4%. But markets before yesterday expected a larger decrease in corn production than actually occurred.

        All of this is in plain English but you babble on with incoherent gibberish while lecturing on reading things you clearly have never read.

        I remember during the 2008 campaign when Sarah Palin lied over and over and even her defenders could not figure out if there was any point to her silly lies. She had really gone off the deep end but her insane behavior has nothing to compare to your pointless lying, babbling, and general insanity.

        Reply
      2. pgl

        “You didn’t understand the fundamental message, that production was UP of the report.”

        Do you always put in bold sentences that makes no sense? That is rather nice of you as it will help your preK teacher spot where you seriously need help with your pathetic writing skills.

        Now repeat after me – 2 plus 2 equals 4.

        Tomorrow we will work on teaching little CoRev to tie his shoe laces.

        Reply

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