cocoa futures prices first exhibit an upward trend from 83:1-84:6 for the CSCE in New York and from 83:1-85:2 for the LIFFE in London, whereas from 85:2-87:12 both cocoa series exhibit a downward trend. The upward trend until mid 84 was due to excess demand on the cocoa market, whereas after January 1986 cocoa prices declined for several years due to excess supply. See for example the graphs of gross crops and grindings of cocoa beans from 1960-1997 in the International Cocoa Organization Annual Report 1997/1998 (see e.g. p.15, Chart I).11 The demand-supply mechanism thus caused the upward and downward trends in cocoa futures prices in the subperiod 1983:1-1987:12. Figure 2.3 suggests that these trends were more pronounced in London for the LIFFE than in New York for the CSCE.
2.7.1 The influence of the Pound-Dollar exchange rate
Figure 2.3 also showed that the Pound-Dollar exchange rate moved in similar trends in the same subperiod 1983:1-1987:12. More precisely, the Pound-Dollar exchange rate increased (the Pound weakened against the Dollar) from January 1983 to reach its high in February 1985. This caused an upward force on the LIFFE cocoa futures price in Pounds, and a downward force on the CSCE cocoa futures price in Dollars. The LIFFE cocoa futures price also peaked in February 1985, while the CSCE cocoa futures price reached its high already in June 1984. After February 1985, the Pound strengthened against the Dollar until April 1988 and the Pound-Dollar exchange rate declined. This caused a downward force on the LIFFE cocoa futures price in Pounds, but an upward force on the CSCE futures price in Dollars. Until January 1986 the LIFFE cocoa price declined, while the CSCE cocoa price rose slightly. After January 1986 cocoa prices fell on both exchanges for a long time, due to excess supply of cocoa beans. We therefore conclude that, by coincidence, the upward and downward trends in the cocoa prices coincide with the upward and downward trends in the Pound-Dollar exchange rate. For the LIFFE in London the trends in exchange rates reinforced the trends in cocoa futures, whereas for the CSCE in New York the trends in the exchange rates weakened the trends in cocoa futures prices.Table 2.14 shows the cross-correlations between the levels of the three data series across all subperiods. It is well known that if two independently generated integrated time series of the order one are regressed against each other in level, with probability one a spurious, but significant relation between the two time series will be found (Phillips