Cointegration tests of the unbiased expectations hypothesis in metals markets

✍ Scribed by Tim Krehbiel; Lee C. Adkins

• Publisher: John Wiley and Sons
• Year: 1993
• Tongue: English
• Weight: 681 KB
• Volume: 13
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990130704

✦ Synopsis

PREVIOUS TESTS OF THE UNBIASED EXPECTATIONS HYPOTHESIS

Price dynamics in the metals markets are not characterized by seasonalities in supply and metals can be stored indefinitely with relatively stable storage costs. Despite these convenient features of the data, previous empirical tests of the unbiased expectations hypothesis and its alternative, normal backwardation, give mixed results. A testable implication of normal backwardation is that the difference between the futures and expected spot price increases as the time remaining to contract expiration rises. Regression tests by Kolb, Jordan, and Gay (1983) find that returns from holding gold and silver contracts increase with the time to maturity. Their sample includes prices from the 1972-1980 period for contracts traded at the Chicago Board of Trade. Park (1985), using a sample from July, 1977 through December, 1981, also finds that returns increase as a function of time to maturity in the metals futures markets. Park and Chen (1985) provide a theoretical model which supports normal backwardation in commodity markets. They find that, in general, the covariance between spot commodity prices and default-free discount bond prices is

The authors are grateful for the helpful comments of the two anonymous referees.