DYNAMIC CALIBRATION OF PRICE-TREND PARAMETERS FOR COMMODITY FUTURES TRADING

This paper addresses the problem of buying commodities through the fut ures markets and deals specifically with a heuristic rule developed fo r the scenario described as 'purchasing under a deadline'. The rule is based on a short-term forecasts produced by Taylor's price-trend mode l. In a previous study applied to the Chicago Board of Trade (CBOT) co rn futures market the price-trend parameters of the stochastic process generating the daily returns were shown to be nearly stable over time and hence could be estimated using a static procedure. However, the a nalysis presented in this paper concerning the CBOT soybean futures ma rket strongly suggests that those parameters were unstable, impairing the successful application of the purchasing rule. The authors recomme nd the continuous CUSUM monitoring of the purchasing results and propo se a procedure for dynamically calibrating the price-trend and buying parameters. Under this procedure the price-trend parameter estimates a re derived from exponentially smoothed sample autocorrelation coeffici ents of the rescaled daily returns. The procedure was developed and te sted using the 1972-87 series of CBOT daily soybean futures closing pr ices. The results suggest that it leads to an improvement on the purch asing results derived from the static parameter calibration procedure formerly adopted.