The relative efficiency of the gold and treasury bill futures markets

✍ Scribed by Margaret A. Monroe; Richard A. Cohn

• Publisher: John Wiley and Sons
• Year: 1986
• Tongue: English
• Weight: 989 KB
• Volume: 6
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990060311

✦ Synopsis

his article examines the pricing efficiency of the gold futures market relative T to the Treasury bill futures market. Futures contracts for gold, a relative newcomer, have only been traded since 1975. T-bill futures contracts, also a relative newcomer, have been traded on organized exchanges since 1976.

To the extent that prices for different delivery dates on the gold contract should reflect some interest rate which is related to the T-bill rate (as a measure of the opportunity cost of storing gold), gold futures prices should exhibit a well-defined relationship with T-bill futures prices in equilibrium. This article demonstrates that the futures markets for gold and T-bills are less than completely efficient relative to each other insofar as the interest rates implied by gold futures prices do tend to stray from their equilibrium level relative to the forward rates implied by the corresponding T-bill futures prices. If the market is inefficient from time to time and the implied gold rate is sometimes too high or too low relative to the implied T-bill rate, then one should be able to make abnormal profits by using trading rules based on the implied rates; evidence of such an ability is presented.

Section I provides a brief review of the literature concerning efficiency in futures markets. Section I1 discusses the nature of futures markets and the mechanics of the "arbitrage" which produces potential profits from observed disequilibria in the gold and T-bill markets. A trading procedure is proposed which is novel because it utilizes a "tail" and a hedge ratio for the gold spreads so as to isolate profit arising solely from changes in relative implied rates. The results of simulated trading over