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The predictability of futures returns: rational variation in required returns or market inefficiency?

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  • Joelle Miffre
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    Abstract

    This paper investigates whether the predictability of futures returns is due to weak-form market inefficiency or to rational variation in the return required by investors over time. Market efficiency is tested with respect to the hypothesis that a conditional multifactor model that allows for shifts in the systematic risk of the futures contract captures the predictability of futures returns. On average 86% of the predictability of futures returns is explained in terms of conditional risk and only 12% of the predictable variance of returns is relegated to the conditional residuals. It follows that the predictability of futures returns most likely results from rational variation in the preferences of economic agents for consumption and investment.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100010034769
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 12 (2002)
    Issue (Month): 10 ()
    Pages: 715-724

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    Handle: RePEc:taf:apfiec:v:12:y:2002:i:10:p:715-724

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    Cited by:
    1. McPherson, Matthew Q. & Palardy, Joseph, 2007. "Are international stock returns predictable?: An examination of linear and non-linear predictability using generalized spectral tests," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 452-464, December.
    2. Wessel Marquering, 2006. "Do consumption-based asset pricing models explain return predictability?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(14), pages 1019-1027.
    3. Stephen Fagan & Ramazan Gencay, 2008. "Liquidity-Induced Dynamics in Futures Markets," EERI Research Paper Series EERI_RP_2008_01, Economics and Econometrics Research Institute (EERI), Brussels.
    4. J. L. Ford & Wee Ching Pok & S. Poshakwale, 2006. "The Predictability of KLSE CI Stock Index Futures Returns and The Conditional Multifactor APT Model," Discussion Papers 06-09, Department of Economics, University of Birmingham.

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