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Testing the martingale hypothesis for futures prices: Implications for hedgers

✍ Scribed by Cédric de Ville de Goyet; Geert Dhaene; Piet Sercu

Publisher
John Wiley and Sons
Year
2008
Tongue
English
Weight
263 KB
Volume
28
Category
Article
ISSN
0270-7314

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✦ Synopsis

Abstract

The martingale hypothesis for futures prices is investigated using a nonparametric approach where it is assumed that the expected futures returns depend (nonparametrically) on a linear combination of predictors. We first collapse the predictors into a single‐index variable where the weights are identified up to scale, using the average derivative estimator proposed by T. Stoker (1986). We then use the Nadaraya–Watson kernel estimator to calculate (and visually depict) the relationship between the estimated index and the expected futures returns. We discuss implications of this finding for a noninfinitely risk‐averse hedger. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:1040–1065, 2008

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