Evidence on normal backwardation and forecasting theory in futures markets

This paper tests the theory of normal backwardation versus forecasting theory in futures markets. The study examines the characteristics of price movements in 29 markets from 1987 to 2007. Empirical evidence indicates that both theories exist and the dominant mechanism varies in different markets. D...

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Bibliographic Details
Published inJournal of derivatives & hedge funds Vol. 15; no. 2; pp. 158 - 170
Main Authors Lee, Jeong W, Zhang, Yilei
Format Journal Article
LanguageEnglish
Published Basingstoke Palgrave Macmillan 01.08.2009
Subjects
Comparative studies
Economic forecasts
Economic theory
Forecasting
Futures market
Futures trading
Hedge funds
Hedging
Prices
Profits
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Summary:This paper tests the theory of normal backwardation versus forecasting theory in futures markets. The study examines the characteristics of price movements in 29 markets from 1987 to 2007. Empirical evidence indicates that both theories exist and the dominant mechanism varies in different markets. Despite the cross-sectional differences across futures markets, the prevailing mechanism in each market is relatively sustainable across time. The majority of the markets experience no change in the dominance of the functional mechanism. However, some markets do switch the dominant mechanisms over the sample period. The results have important implications on understanding the futures risk premium and the hedging needs in different futures markets. [PUBLICATION ABSTRACT]
ISSN:1753-9641
1753-965X
DOI:10.1057/jdhf.2009.6