Market Efficiency and Price Discovery in Cocoa Markets

This paper tests the efficiency and price discovery mechanism in the cocoa cash and futures markets over the period March 1981-August 2009. The results indicate that the price discovery is done in the cash market and spreads to the futures markets and that the futures price can be seen as an unbiased predictor of future cash prices. There is no sign of a risk premium in the futures price. Since the cash behaves like a random walk we cannot reject market efficiency.