Quarterly Storage Model of U.S. Cotton Market: Estimation of the Basis under Rational Expectations
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The paper outlines an approach to estimation and analysis of the futures basis in the U.S. cotton market under weakly rational expectations. Given the model specification derived from the underlying dynamic profit optimization problem of the dealers, the intermediary market model is estimated using the self-organizing state-space (SOSS) approach. Estimation results are used to evaluate the prediction power of the method and test the main assumptions about the existence and consistency of the subjective rational expectations incorporated in the model.