Reexamination of Normal Backwardation Hypothesis in Futures Markets

✍ Scribed by Hun Y. Park

• Book ID: 102843854
• Publisher: John Wiley and Sons
• Year: 1985
• Tongue: English
• Weight: 616 KB
• Volume: 5
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990050402

✦ Synopsis

he lack of consensus on the underlying process as well as the determinants T of futures prices has led a number of researchers to take a variety of positions in developing models of futures contracts. Normal backwardation/normal contango refers to the process in which futures prices are systematically downward/upward biased estimates of expected spot prices over time.' In order.to test the hypothesis, a number of studies have examined the rate of returns on various futures contractsincluding those on agricultural commodities, precious metals, and financial instruments-and reached different conclusions. O'Brien and Schwarz (1982) observed downward biased futures prices for Gold. However, as Wilson (1982) pointed out, they did not delve into the question why the downward bias of futures prices obtained. In general, the observed divergencies, if any, between futures prices and expected spot prices have been often attributed to market inefficiencies.3 'For the controversy over the underlying process of futures prices, see Keynes (1930. Houthakker