Test of the efficiency of commodity futures in a multi-contract framework

Abstract

This paper has extended the EMH to encompass multiple contracts with different expectational horizons. A time series model was estimated for agricultural commodities using a methodology which explicitly accounts for the presence of overlapping data in the samples. The empirical evidence points to the conclusion that the relationships between spot and futures prices over different contracts that are traded simultaneously do not conform to the predictions of the EMH. Past forecast errors of contracts of different maturities can then be exploited by market participants to make trading decisions about these contracts. This finding is of importance, given the emergence of recent literature on the decline of sources of information in the agricultural sector (Just 1983; Gardner 1983) and does not confirm Working's (1942) and Just's (1983) theoretical supposition that futures prices can provide market participants with the necessary information when making forecasts about spot prices for agricultural commodities. The results, moreover, suggest that future research on hedging strategies needs to incorporate the informational content of the multi-contract relationships that exist in these markets.