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Backwardation and Normal Backwardation in Energy Futures Markets: With an Application to Metallgesellschaft's Short-Dated Rollover Hedging of Long-Term Contracts

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  • Deaves, Richard
  • Charupat, Narat

Abstract

We show that, since the inception of energy futures markets, prices have on average exhibited backwardation. Normal backwardation has also been the norm, but, because of the low power of the standard tests, most researchers have concluded that the unbiased expectations model cannot be rejected. The fact that backwardation has been and (though somewhat more weakly) continues to be prevalent makes MGRM?s strategy of hedging long-term supply commitments with short-dated futures contracts look somewhat better than previous observers have argued. That said, it should be re-stressed that their strategy was a highly speculative one and its unraveling should have come as no great surprise.

Suggested Citation

  • Deaves, Richard & Charupat, Narat, 2002. "Backwardation and Normal Backwardation in Energy Futures Markets: With an Application to Metallgesellschaft's Short-Dated Rollover Hedging of Long-Term Contracts," ZEW Discussion Papers 02-59, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    • Handle: RePEc:zbw:zewdip:553
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    References listed on IDEAS

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    1. Paul Berhanu Girma & Albert S. Paulson, 1998. "Seasonality in petroleum futures spreads," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(5), pages 581-598, August.
    2. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
    3. Neuberger, Anthony, 1999. "Hedging Long-Term Exposures with Multiple Short-Term Futures Contracts," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 429-459.
    4. Christopher L. Culp & Merton H. Miller, 1995. "Metallgesellschaft And The Economics Of Synthetic Storage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 62-76.
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    6. repec:cup:etheor:v:11:y:1995:i:1:p:122-50 is not listed on IDEAS
    7. Carter, Colin A & Rausser, Gordon C & Schmitz, Andrew, 1983. "Efficient Asset Portfolios and the Theory of Normal Backwardation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 319-331, April.
    8. Antonio S. Mello & John E. Parsons, 1995. "Maturity Structure Of A Hedge Matters: Lessons From The Metallgesellschaft Debacle," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 106-121.
    9. Richard Deaves & Itzhak Krinsky, 1992. "Risk Premiums and Efficiency in the Market for Crude Oil Futures," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 93-118.
    10. 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..
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    Cited by:

    1. Mamatzakis, E. & Remoundos, P., 2011. "Testing for adjustment costs and regime shifts in BRENT crude futures market," Economic Modelling, Elsevier, vol. 28(3), pages 1000-1008, May.

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