Introduction
e of the most intriguing and long standing conjectures concerning the 0. pattern of prices on futures markets is that prices display "backwardation," at least on a seasonal basis. The term backwardation has a long history of use on the London stock exchange, and was adapted to futures markets by Keynes (1930) who interpreted the term to mean a situation in which the forward price for a commodity was less than the spot price of the commodity. Keynes argued in Treatise on Money that backwardation in this sense is the "normal" state of affairs, in the case of commodities for which inventory holding is negligible. In Value and Capital, Hicks (1939) argues the Keynes position in the general case, including that of seasonal cornmodities, using Keynes' concept of backwardation. Working has also used the Keynesian definition of backwardation in most of his writings, although he finds little if any evidence for backwardation in this sense for commodities such as cotton, wheat, and corn.
The term has changed meaning over time, however. Houthakker (1957) was apparently the first to define backwardation as a situation in which, on average, futures prices rise over time, so that the current futures price is less than its expected price in future periods. This has become a more or less standard use of this term,' and it is the definition adopted here. For example, this is the interpretation of backwardation that appears in the famous controversy between Telser (1958, 1960) and Cootner (1960). Cootner and Houthakker both argue that backwardation is the "normal" *I am indebted to James Quirk, Mohamed El-Hodiri, Quang Vuong, Joseph Sicilian. the Editor, and two anonymous referees for helpful comments. The research is supported in part by a grant from The Center for the Study of Futures Markets at Columbia University. All errors, of course, remain mine. 'The backwardation is sometimes also defined as the process where the futures price is a systematically downward biased estimate of the expected spot price over time. The relationship between the two definitions of backwardation are discussed in Lien (1986).