Predictors Of Future Spot Prices Research Articles

A tale of two coffees? Analysing interaction and futures market efficiency

Purpose The purpose of this paper is to assess the informational efficiency of Arabica (other milds) and Robusta coffee futures markets in terms of predicting future coffee spot prices. Design/methodology/approach Futures market efficiency is associated with the existence of a long-run equilibrium relationship between spot and future prices such that coffee futures prices are unbiased predictors of future spot prices. This study applies unit root testing to daily data for futures-spot price differentials. A range of maturities for futures contracts are considered, and the study also uses a recursive approach to consider time variation in futures market efficiency. Findings The other milds and Robusta futures prices tend to be unbiased predictors for their own respective spot prices. The paper further finds that other milds and Robusta futures prices are unbiased predictors of the respective Robusta and other milds spot prices. Recursive estimation suggests that the futures market efficiency associated with these cross cases has increased, though with no clear link to the implementation of the 2007 International Coffee Agreement. Originality/value The paper draws new insights into futures market efficiency by examining the two key types of coffee and analyses the potential interactions between them. Hitherto, no attention has been paid to futures contracts of the Robusta variety. The employment of unit root testing of spot futures coffee price differentials can be viewed as more stringent than an approach based on non-cointegration testing.

On the short- and long-run efficiency of energy and precious metal markets

This article contributes to the related literature by empirically investigating the efficiency of nine energy and precious metal markets over the last decades, employing several pronounced models. We test for both short- and the long-run efficiency using, in addition to linear cointegration models, nonlinear cointegration and error-correction models (ECMs) which allow the efficiency intensity to change per regime. Our findings can be summarized as follows: i) futures prices are found to be cointegrated with spot prices, but they do not constitute unbiased predictors of future spot prices; ii) the hypothesis of risk neutrality is rejected; iii) the short-run efficiency hypothesis is rejected, suggesting that using past futures price returns improves the modeling and forecasting of future spot prices; and iv) the nonlinear modeling suggests the presence of two distinct regimes wherein the first regime the efficiency hypothesis is supported, whereas in the second it is rejected. The empirical findings have important implications for producers, hedgers, speculators and policymakers.

Testing the efficiency of the aluminium market: evidence from London metal exchange

This article studies the efficiency of the aluminium market based on contracts traded on the London Metal Exchange (LME) over the last 3 decades. We test for both short- and long-run efficiency using nonlinear cointegration and Error Correction Models (ECM). Our findings suggest the following points. First, futures aluminium prices are found to be cointegrated with spot prices, but they do not constitute unbiased predictors of future spot prices. Second, the hypothesis of risk neutrality is rejected, but there is no evidence in favour of a time-varying risk premia. Finally, using past futures price returns improves the modelling and forecast of future spot price returns and the short-run efficiency hypothesis is rejected by regime, in particular when the disequilibrium size between spot and futures prices is high. Our findings have important implications for producers, arbitrageurs, speculators as well as policymakers.

Speculative Market Efficiency and Hedging Effectiveness of Emerging Chinese Index Futures Market

With the daily sample of CSI300 index and CSI300 index futures prices, we investigate the market efficiency and hedging effectiveness of the Chinese index futures market. Cointegration test is employed to examine the market efficiency; OLS, the symmetric bivariate GARCH, the asymmetric bivariate GARCH and time-varying copulas are used to estimate hedging effectiveness. The result shows that CSI300 index futures prices are cointegrated with spot prices and are unbiased predictors of future spot prices. The hedging effectiveness of CSI300 index futures is about 91%, so it can help investors to avoid the systematic risk in the spot market well. Besides, the hedge ratio conducted by the OLS model is the best-performed in variance reduction, very closely followed by the time-varying copulas. Since the dynamic hedge ratios are less stable and having pronounced fluctuations, the hedgers had to adjust their futures positions. The static OLS hedge strategy might be indeed a good choice considering the high transaction cost.

The speculative efficiency of the aluminum market: A nonlinear investigation

This paper studies the speculative efficiency of the aluminum contract traded in the London Metal Exchange over the last three decades. We investigate both short and long-run efficiency using linear and nonlinear cointegration approaches and Error Correction Models (ECM). Our findings point out the following points. First, futures aluminum prices are found to be cointegrated with spot prices and they do not constitute unbiased predictors of future spot prices. Second, the hypothesis of risk neutrality is rejected. Finally, the short-run efficiency hypothesis is rejected and using past futures price returns improves the modelling and forecast of future spot price. Our findings have important implications for producers, arbitrageurs, speculators as well as policymakers. As far as our knowledge allows to remember, this paper is the first attempt to test both linear and nonlinear efficiency for the aluminum market.

The Predictive Content of Commodity Futures

This paper examines the relationship between spot and futures prices for a broad range of commodities, including energy, precious and base metals, and agricultural commodities. In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. While energy futures prices are generally unbiased predictors of future spot prices, there is much stronger evidence against the null for other commodity markets. This difference appears to be driven in part by the depth of each market. We find that over the last five years, it is much harder to reject the null of futures prices being unbiased predictors of future spot prices than in earlier periods for almost all commodities. In addition, futures prices do approximately as well as a random walk in forecasting future spot prices, and vastly outperform a reduced form empirical model.

The Predictive Content of Commodity Futures

This paper examines the relationship between spot and futures prices for commodities, including those for energy (crude oil, gasoline, heating oil markets and natural gas), precious and base metals (gold, silver, aluminum, copper, lead, nickel and tin), and agricultural commodities (corn, soybean and wheat). In particular, we examine whether futures prices are (1) an unbiased and/or (2) accurate predictor of subsequent spot prices. We find that while energy futures prices are generally unbiased predictors of future spot prices, there are certain notable exceptions. For both base and precious metals, the results are much less favorable to unbiasedness hypothesis. For precious metals and copper and lead, we strongly reject the null that β=1 at all three horizons. For the these other base metals, while we cannot reject that β=1, due to large standard errors. Finally, both corn and soybean futures have β close to 1, while wheat has β

Forecasting the price of crude oil via convenience yield predictions

AbstractThe paper develops an oil price forecasting technique which is based on the present value model of rational commodity pricing. The approach suggests shifting the forecasting problem to the marginal convenience yield, which can be derived from the cost‐of‐carry relationship. In a recursive out‐of‐sample analysis, forecast accuracy at horizons within one year is checked by the root mean squared error as well as the mean error and the frequency of a correct direction‐of‐change prediction. For all criteria employed, the proposed forecasting tool outperforms the approach of using futures prices as direct predictors of future spot prices. Vis‐à‐vis the random‐walk model, it does not significantly improve forecast accuracy but provides valuable statements on the direction of change. Copyright © 2007 John Wiley & Sons, Ltd.

Extreme volatility, speculative efficiency, and the hedging effectiveness of the oil futures markets

AbstractThis study investigates the efficiency of the New York Mercantile Exchange (NYMEX) Division light sweet crude oil futures contract market during recent periods of extreme conditional volatility. Crude oil futures contract prices are found to be cointegrated with spot prices and unbiased predictors of future spot prices, including the period prior to the onset of the Iraqi war and until the formation of the new Iraqi government in April 2005. Both futures and spot prices exhibit asymmetric volatility characteristics. Hedging performance is improved when asymmetries are accounted for. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:61–84, 2007

The Efficiency of the Chinese Commodity Futures Markets: Development and Empirical Evidence

This study investigates the efficiency of the Chinese metal futures (i. e. copper and aluminum) traded on China's Shanghai Futures Exchange. First, we thoroughly analyze the development of China's commodity futures markets, which provides a fundamental background. Then we examine the random walk and unbiasedness hypotheses for two metal futures during 1999–2004. Based on the empirical evidence, we argue that China's copper and aluminum futures markets are efficient, and that they aid the process of price discovery because futures prices can be considered as unbiased predictors of future spot prices. We attribute this efficiency to the regulatory changes made in 1999 and the increased financial skills and acumen of the participants in the market. Edited by Xiaoming Feng

Forecasting the Price of Crude Oil Via Convenience Yield Predictions

The paper develops an oil price forecasting technique which is based on the present value model of rational commodity pricing. The approach suggests shifting the forecasting problem to the marginal convenience yield which can be derived from the cost-of-carry relationship. In a recursive out-of-sample analysis, forecast accuracy at horizons within one year is checked by the root mean squared error as well as the mean error and the frequency of a correct direction-of-change prediction. For all criteria employed, the proposed forecasting tool outperforms the approach of using futures prices as direct predictors of future spot prices. Vis-a-vis the random-walk model, it does not significantly improve forecast accuracy but provides valuable statements on the direction of change.

On the information content of oil future prices

This paper deals with the efficiency of the Brent Crude oil future contracts and tests whether futures can be used to predict realized oil spot prices. Evidence suggests that future prices up to three-months contracts on Brent Crude are unbiased predictors of future spot prices but the explanation power is not high (around 20%). Furthermore, using cointegration techniques the unbiasedness hypothesis for future prices as predictors of realized spot prices could not be rejected. When the sample is divided into sub-periods, the absence of bias in futures prices is rejected.

The Predictive Characteristics of Energy Futures: Recent Evidence for Crude Oil, Natural Gas, Gasoline and Heating Oil

This paper examines the relationship between futures and spot prices for energy commodities. In particular, we examine whether futures prices are (1) an unbiased predictor of subsequent spot prices and (2) whether futures prices are a good predictor of subsequent spot prices, in the crude oil, gasoline, heating oil markets and natural gas markets. We find that while futures prices are unbiased predictors of future spot prices in the first three markets, they are also fairly inaccurate predictors. Natural gas futures prices are both a biased predictor of subsequent spot prices at two of three horizons examined, and a poor predictor.

The False Teachings of the Unbiased Expectations Hypothesis

The unbiased expectations hypothesis is the basis for many current investment strategies, despite its shortcomings. Yet the spot–forward parity theorem and the unbiased expectations hypothesis cannot both hold. Why do some in the investment community continue to believe that there is any more information in forward prices or rates than spot prices or rates? The authors show that forward prices have to be biased predictors of future spot prices, or arbitrage opportunities would arise. The bias is fair compensation for the difference in the timing of the cash flows between the spot and forward markets. The authors argue that the unbiased expectations hypothesis often forms the basis for trading strategies only because of the zero initial value and non–zero future value, the misuse of forwards in performance attribution, and a misunderstanding of the symmetry of risk premiums.

TESTING THE EFFICIENCY OF THE SOUTH AFRICAN FUTURES MARKET FOR WHITE MAIZE / TOETSING VAN DIE DOELTREFFENDHEID VAN DIE SUID-AFRIKAANSE TERMYNKONTRAKMARK VIR WITMIELIES

Cointegration analysis is used to test whether the South African futures market for white maize was efficient (futures prices predict spot (cash) prices that reflect all publicly available information) in 1997 and 1998. Tests are also conducted to assess whether or not white maize futures prices are unbiased predictors of future spot prices (for effective price discovery). There was no long-run relationship between white maize futures and spot prices for 1997, but there is evidence of a long-run relationship between these price series in 1998. Furthermore, the 1998 futures price was an unbiased predictor of future spot prices for both the annual and three-month contract. This could be evidence of a market learning process and a progression towards efficiency, which has seen a marked increase in market liquidity (contract volumes traded) since late 1996.

Equilibrium in a Futures Market

Normal backwardation, the hypothesis that futures prices normally lie below expected future spot prices, was justified by Keynes [6] and Hicks [2] by the contention that speculators, while risk averse, are less so than hedgers. Consequently, hedgers pay speculators to bear that hedgers' risk. Houthakker [5] supported this view arguing that according to all available data short hedging (and conversely long speculation) is the more common type. Working [9] favored the view that futures prices are unbiased predictors of future spot prices. If this is true, hedgers are not, on average, paying to reduce their risk nor are speculators, on average, earning a premium for assuming risk. Risk averse speculators will participate in such a market only if there are nonhomogeneous beliefs regarding the expected spot price. The level of futures prices is important not only because it determines the cost of hedging, but also because it influences production decisions. In light of the competing views in the literature of both the level of futures prices and the factors which determine them, we will analyze these issues in this paper. To do so, we employ a model based on incomplete markets in certainty claims. In this, and other respects identified later, the model parallels existing futures markets in agricultural commodities. The analysis shows, in the absence of speculators, that the relative magnitudes of the futures price, pf, and the expected future spot price, E(P), are determined by the business transactions of, and markets available to, those economic units with a commercial or production interest in the commodity. This defines the conditions under which there is a role for speculators even if they have the same degree of risk aversion and share the expectations of other market participants. Thus, neither differences in degrees of risk