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Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

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  • Viviana Fernandez

Abstract

Recent research has concluded that spot and futures copper returns are more closely correlated during periods of contango than of backwardation. It is argued speculation and investor demand in futures markets should affect spot prices to a much lesser extent during backwardation, due to an infeasible inter‐temporal arbitrage. This article expands this line of research by analyzing daily spot and 3‐, 15‐, and 27‐month futures contract prices for industrial metals traded on the London Metal Exchange over a period of more than two decades. Estimates of convenience yields are provided, along with tests for Granger causality between futures and spot returns after accounting for cointegration, and tests for statistical differences between correlations of contemporaneous spot and futures returns during periods of contango and backwardation. After various robustness checks, the evidence supporting a stronger linkage between spot and futures markets in contango is weak. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 36:375–396, 2016

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  • Viviana Fernandez, 2016. "Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(4), pages 375-396, April.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:4:p:375-396
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    Cited by:

    1. Seungho Baek & Mina Glambosky & Seok Hee Oh & Jeong Lee, 2020. "Machine Learning and Algorithmic Pairs Trading in Futures Markets," Sustainability, MDPI, vol. 12(17), pages 1-24, August.
    2. Junior, Peterson Owusu & Tiwari, Aviral Kumar & Padhan, Hemachandra & Alagidede, Imhotep, 2020. "Analysis of EEMD-based quantile-in-quantile approach on spot- futures prices of energy and precious metals in India," Resources Policy, Elsevier, vol. 68(C).
    3. Rubaszek Michal & Karolak Zuzanna & Kwas Marek & Uddin Gazi Salah, 2020. "The role of the threshold effect for the dynamics of futures and spot prices of energy commodities," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 24(5), pages 1-20, December.
    4. Fernandez, Viviana, 2016. "Further evidence on the relationship between spot and futures prices," Resources Policy, Elsevier, vol. 49(C), pages 368-371.
    5. Rubaszek, Michał & Uddin, Gazi Salah, 2020. "The role of underground storage in the dynamics of the US natural gas market: A threshold model analysis," Energy Economics, Elsevier, vol. 87(C).
    6. Jia, Jian & Kang, Sang Baum, 2022. "Do the basis and other predictors of futures return also predict spot return with the same signs and magnitudes? Evidence from the LME," Journal of Commodity Markets, Elsevier, vol. 25(C).
    7. Hsu, Chih-Hsiang, 2021. "The predictability of the return correlation of futures with different expirations in the Chinese futures market," Resources Policy, Elsevier, vol. 74(C).
    8. Marek Kwas & Michał Rubaszek, 2021. "Forecasting Commodity Prices: Looking for a Benchmark," Forecasting, MDPI, vol. 3(2), pages 1-13, June.
    9. Clark, Andrew, 2022. "Causality in the aluminum market," Journal of Commodity Markets, Elsevier, vol. 27(C).

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