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Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts

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Author Info
Daal, Elton (University of New Orleans)
Farhat, Joseph Basheer (Hashemite University)
Wei, Peihwang P. (University of New Orleans)
Abstract

In a seminal article, Samuelson (1965) proposes the maturity effect that volatility of futures prices should increase as futures contract approaches maturity. This study provides new evidence on the maturity effect by examining a more extensive set of futures contracts than previous studies and analyzing each contract separately. Using 6805 futures contracts drawn from 61 commodities, including some data from non-US markets, we find that the maturity effect is absent in the majority of contracts. In addition, the maturity effect tends to be stronger in agricultural and energy commodities than in financial futures. We also examine the hypothesis in Bessembinder, Coughenour, Seguin, and Smoller (1996), which states that negative covariance between the spot price and net carry cost causes the maturity effect in futures. Our results provide very weak evidence in favor of this hypothesis.

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Paper provided by University of New Orleans, Department of Economics and Finance in its series Working Papers with number 2004-03.

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Length: 25 pages
Date of creation: 2004
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Handle: RePEc:uno:wpaper:2004-03

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Related research
Keywords: Maturity effect; Futures prices volatility; Futures markets;

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. Grammatikos, Theoharry & Saunders, Anthony, 1986. "Futures Price Variability: A Test of Maturity and Volume Effects," Journal of Business, University of Chicago Press, vol. 59(2), pages 319-30, April. [Downloadable!] (restricted)
  3. Chamberlain, Trevor W, 1989. "Maturity Effects in Futures Markets: Some Evidence from the City of London," Scottish Journal of Political Economy, Scottish Economic Society, vol. 36(1), pages 90-95, February.
  4. 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. [Downloadable!] (restricted)
  5. Anderson, Ronald W & Danthine, Jean-Pierre, 1983. "The Time Pattern of Hedging and the Volatility of Futures Prices," Review of Economic Studies, Blackwell Publishing, vol. 50(2), pages 249-66, April. [Downloadable!] (restricted)
  6. Rutledge, D J S, 1976. "A Note on the Variability of Futures Prices," The Review of Economics and Statistics, MIT Press, vol. 58(1), pages 118-20, February. [Downloadable!] (restricted)
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