Basis variation and a common source of risk: evidence from UK futures markets
Using multiple equation Generalized Method of Moments (GMM) system estimation procedures and monthly data at the three maturity horizons of 6, 9 and 12 months, the paper explores whether conditional spreads between futures and spot rates on five contracts traded on LIFFE have a common predictable component driven by a single unobservable source of risk. The future contracts studied are: 3-month ECU; 3-month Euromark; FT100 Index; German Government Bond; and 3-month Short Sterling. The sample period is October 1989 through August 1996. Movement in the price of systematic risk is proxied by ex ante variables that have been shown to have predictive power for returns from bond and stock markets. These are: the return on the US Standard and Poor index; the return on the German Dax index; the UK and US 3-month treasury bill yield differential; the spread between the UK 20-year gilt yield and the UK 3-month treasury bill yield; the spread between the debenture and loan stock yield and, the 20-year gilt yield; the dividend yield on the FT Actuaries All Share index; and the change in the yields on UK government consol 2.5% bonds. The results indicate that common variation in bases exists and that relative conditional covariances are constant over all horizons. The evidence reported also suggests that, at short horizons, common basis variation is associated with both spot price forecasts and futures market risk while, at medium and long horizons, the dominant source of the reported common basis variation is due to the systematic risk associated with the futures position.
Volume (Year): 7 (2001)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/REJF20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/REJF20|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- John Barkoulas & Christopher F. Baum, 1996.
"Time-Varying Risk Premia in the Foreign Currency Futures Basis,"
Boston College Working Papers in Economics
281., Boston College Department of Economics.
- Christopher F. Baum & John Barkoulas, 1996. "Time‐varying risk premia in the foreign currency futures basis," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(7), pages 735-755, October.
- Hamao, Yasushi & Campbell, John, 1992.
"Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration,"
3207694, Harvard University Department of Economics.
- Campbell, John Y & Hamao, Yasushi, 1992. " Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration," Journal of Finance, American Finance Association, vol. 47(1), pages 43-69, March.
- John Y. Campbell & Yasushi Hamao, 1989. "Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration," NBER Working Papers 3191, National Bureau of Economic Research, Inc.
- Cootner, Paul H., 1967. "Speculation and Hedging," Food Research Institute Studies, Stanford University, Food Research Institute.
- Keim, Donald B. & Stambaugh, Robert F., 1986.
"Predicting returns in the stock and bond markets,"
Journal of Financial Economics,
Elsevier, vol. 17(2), pages 357-390, December.
- Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
- Andrew Clare & Raymond O'Brien & Stephen Thomas & Michael Wickens, . "Macroeconomic Shocks and the Domestic CAPM: Evidence from the UK Stock Market," Discussion Papers 94/10, Department of Economics, University of York.
- 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.
- Fraser, Patricia & McKaig, Andrew J, 1998. "The Time Series Behaviour of Asset Prices: Evidence from UK Futures Markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(2), pages 143-55, April.
- Campbell, John Y., 1987.
"Stock returns and the term structure,"
Journal of Financial Economics,
Elsevier, vol. 18(2), pages 373-399, June.
- Black, Angela & Fraser, Patricia & MacDonald, Ronald, 1997. "Business Conditions and Speculative Assets," The Manchester School of Economic & Social Studies, University of Manchester, vol. 65(4), pages 379-93, September.
- Clare, A. D. & Thomas, S. H., 1992. "International evidence for the predictability of bond and stock returns," Economics Letters, Elsevier, vol. 40(1), pages 105-112, September.
- Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
- Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
- Black, Angela & Fraser, Patricia, 1995. "U.K. Stock Returns: Predictability and Business Conditions," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(0), pages 85-102, Suppl..
- Nijman, T.E. & de Roon, F.A. & Veld, C.H., 1996.
"Pricing Term Structure Risk in Futures Markets,"
1996-78, Tilburg University, Center for Economic Research.
- Fleming, Jeff & Kirby, Chris & Ostdiek, Barbara, 1998. "Information and volatility linkages in the stock, bond, and money markets," Journal of Financial Economics, Elsevier, vol. 49(1), pages 111-137, July.
- Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
- Clare, A.D. & Thomas, S.H., 1992. "International evidence for the predictability of bond and stock returns," Discussion Paper Series In Economics And Econometrics 9206, Economics Division, School of Social Sciences, University of Southampton.
- Cumby, Robert E., 1990. "Consumption risk and international equity returns: some empirical evidence," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 182-192, June.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
- Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
- Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
- Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
- Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
- Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc.
- Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
- Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
- Bailey, Warren & Chang, K C, 1993. " Macroeconomic Influences and the Variability of the Commodity Futures Basis," Journal of Finance, American Finance Association, vol. 48(2), pages 555-73, June.
- Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
- Merton, Robert C., 1985. "On the current state of the stock market rationality hypothesis," Working papers 1717-85., Massachusetts Institute of Technology (MIT), Sloan School of Management.
When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:7:y:2001:i:1:p:39-62. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.