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Pricing Term Structure Risk in Futures Markets

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Author Info

  • Nijman, T.E.
  • Roon, F.A. de
  • Veld, C.H.

    (Tilburg University, Center for Economic Research)

Abstract

One-period expected returns on futures contracts with di erent maturities di er because of risk premia in the spreads between futures and spot prices.We analyze the expected returns for futures contracts with di erent maturities using the information that is present in the current term structure of futures prices.A simple a ne one-factor model that implies a constant covariance between the pricing kernel and the cost-of-carry can not be rejected for heating oil and German Mark futures contracts.For gold and soybean futures the risk premia depend on the slope of the current term structure of futures prices, while for live cattle futures the evidence is mixed.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1996-78.

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Date of creation: 1996
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Handle: RePEc:dgr:kubcen:199678

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Web page: http://center.uvt.nl

Related research

Keywords: futures markets; financial risk;

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References

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  1. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-87, October.
  2. Bessembinder, Hendrik, et al, 1995. " Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure," Journal of Finance, American Finance Association, vol. 50(1), pages 361-75, March.
  3. Fama, Eugene F., 1984. "Term premiums in bond returns," Journal of Financial Economics, Elsevier, vol. 13(4), pages 529-546, December.
  4. McCurdy, Thomas H. & Morgan, Ieuan G., 1987. "Tests of the martingale hypothesis for foreign currency futures with time-varying volatility," International Journal of Forecasting, Elsevier, vol. 3(1), pages 131-148.
  5. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
  6. Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-93, December.
  7. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  8. Fama, Eugene F., 1986. "Term premiums and default premiums in money markets," Journal of Financial Economics, Elsevier, vol. 17(1), pages 175-196, September.
  9. John Y. Campbell & Andrew W. Lo & A. Craig MacKinlay, 1994. "Models of the term structure of interest rates," Working Papers 94-10, Federal Reserve Bank of Philadelphia.
  10. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  11. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  12. Fama, Eugene F & French, Kenneth R, 1987. "Commodity Futures Prices: Some Evidence on Forecast Power, Premiums,and the Theory of Storage," The Journal of Business, University of Chicago Press, vol. 60(1), pages 55-73, January.
  13. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  14. Cox, John C. & Ingersoll, Jonathan Jr. & Ross, Stephen A., 1981. "The relation between forward prices and futures prices," Journal of Financial Economics, Elsevier, vol. 9(4), pages 321-346, December.
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Cited by:
  1. Shi, Wei & Irwin, Scott H. & Good, Darrel L. & Dietz, Sarah N., 2005. "Wheat Forward Contract Pricing: Evidence on Forecast Power and Risk Premia," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19043, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  2. Frans A. de Roon & Rob W. J. van den Goorbergh & Theo E. Nijman, 2004. "An Anatomy of Futures Returns: Risk Premiums and Trading Strategies," WO Research Memoranda (discontinued) 757, Netherlands Central Bank, Research Department.
  3. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.
  4. Patricia Fraser & Andrew McKaig, 2001. "Basis variation and a common source of risk: evidence from UK futures markets," The European Journal of Finance, Taylor & Francis Journals, vol. 7(1), pages 39-62.

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