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Bias and backwardation in natural gas futures prices

✍ Scribed by Nahid Movassagh; Bagher Modjtahedi

Publisher: John Wiley and Sons
Year: 2005
Tongue: English
Weight: 299 KB
Volume: 25
Category: Article
ISSN: 0270-7314
DOI: 10.1002/fut.20151

No coin nor oath required. For personal study only.

✦ Synopsis

This paper tests the fair-game efficient-markets hypothesis for the natural gas futures prices over the period 1990 through 2003. We find evidence consistent with the Keynesian notion of normal backwardation. Regressing the future spot prices on the lagged futures prices and using the Stock-Watson (1993) procedure to correct for the correlation between the error terms and the futures prices, we find that natural gas futures are biased predictors of the corresponding future spot prices for contracts ranging from 3 to 12 months. These results cast a serious doubt on the commonly held view that natural gas futures sell at a premium over the expected future spot prices, and that this bias is due to the systematic risk of the futures price movements represented by a negative "beta." We also find evidence for the Samuelson effect.

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