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Abstract

This study re-examines the price discovery process of fed cattle markets by taking into account the dynamic effects from unexpected shocks to fed cattle markets. That is, we investigate whether ensuing shocks to the industry, specifically from BSE outbreaks, resulted in any temporal or permanent changes in the reference market(s) (futures market) obtained from the price discovery process. Using weekly weighted average fed cattle cash prices for Nebraska and weekly average live cattle CME futures prices, from May 2001 to January 2017, we construct forward growing samples. The first sample is from May 2001 until four weeks before the first BSE outbreak, and the second sample onwards sequentially incorporates four more weeks of data until January 2017. We model these samples as rolling bivariate Error Correction Models (ECM) and test whether the futures prices hold as the reference market during the three U.S. BSE outbreaks (December 2003, June 2005, and March 2006). Findings are that during and following the first and second BSE outbreaks, the cash market price became the (new) reference price. During this period, the U.S. experienced a ban of beef exports, in particular to its largest markets Japan and South Korea. The futures market became the reference price (again) only a month before the export ban was partially lifted. In addition, we found no changes to the reference market in the thirdBSE outbreaks; when no export bans occurred. Thus unexpected shocks that produced significant impacts, for example, export bans on the market, were accompanied by a change in reference market.

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