Evidence on normal backwardation and forecasting theory in futures markets

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By this author: Lee, Jeong W ;&nbsp; Zhang, Yilei

Authors: Lee, Jeong W; Zhang, Yilei

Source: Journal of Derivatives & Hedge Funds, Volume 15, Number 2, August 2009 , pp. 158-170(13)

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Abstract:

This paper tests the theory of normal backwardation versus forecasting theory in futures markets. The study examines the characteristics of price movements in 29 markets from 1987 to 2007. Empirical evidence indicates that both theories exist and the dominant mechanism varies in different markets. Despite the cross-sectional differences across futures markets, the prevailing mechanism in each market is relatively sustainable across time. The majority of the markets experience no change in the dominance of the functional mechanism. However, some markets do switch the dominant mechanisms over the sample period. The results have important implications on understanding the futures risk premium and the hedging needs in different futures markets.Journal of Derivatives & Hedge Funds (2009) 15, 158-170. doi:10.1057/jdhf.2009.6

Document Type: Research article

DOI: http://dx.doi.org/10.1057/jdhf.2009.6

Publication date: 2009-08-01