Showing papers on "Spot contract published in 1995"

Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Abstract: We use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices. The empirical results indicate mean reversion in each market we examine. For agricultural commodities and crude oil the magnitude of the estimated mean reversion is large; for example, point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months. For metals, the degree of mean reversion is substantially less, but still statistically significant. We detect only weak evidence of mean reversion in financial asset prices. IN THIS STUDY, WE provide evidence of mean reversion in the prices of several real and financial assets. Rather than examining evidence of ex post reversion using time series of asset prices, we use price data from futures contracts with varying delivery horizons to test whether investors expect asset prices to revert. This approach offers two advantages. First, since futures prices are readily available for many markets, our procedure can be implemented for many assets, including those for which reliable spot price data is elusive. Second, there is little ambiguity as to the source of any mean reversion detected using our method. Subject only to the maintained assumption that the no-arbitrage cost-of-carry condition holds, our test detects mean reversion that is expected to occur in equilibrium, but has no power to detect mean reversion resulting from noise or inefficiencies. Our methodology focuses on relations between price levels and the slope of the futures term structure, defined as the change across delivery dates in the futures prices observed on a given trading date. An inverse relation between prices and the futures term slope constitutes evidence that investors expect mean reversion in spot prices. To illustrate, initially assume there are no

Backwardation in Oil Futures Markets: Theory and Empirical Evidence

Abstract: Oil futures prices are often below spot prices. This phenomenon, known as strong backwardation, is inconsistent with Hotelling's theory under certainty that the net price of an exhaustible resource rises over time at the rate of interest. We introduce uncertainty and characterize oil wells as call options. We show that (1) production occurs only if discounted futures are below spot prices, (2) production is non-increasing in the riskiness of future prices, and (3) strong backwardation emerges if the riskiness of future prices is sufficiently high. The empirical analysis indicates that U.S. oil production is inversely related and backwardation is directly related to implied volatility.

Power Markets and Market Power

Abstract: Privatization was intended to make the English bulk electricity market sufficiently competitive to avoid the need for regulation, but two generators set the spot price over 90% of the time though they supply less than 60% of total electricity generated Their market power depends on their share of non-baseload plant, and agreed divestiture here should increase competition The paper argues that the contract market, which makes entry contestable, will ensure that long-run average prices are kept at the competitive entry level, with increased competition mainly increasing medium-run volatility and short-run economic efficiency 24 refs, 7 figs, 1 tab

Heterogeneous Expectations and Tests of Efficiency in the Yen/Dollar Forward Foreign Exchange Rate Market

Abstract: This paper examines the efficiency of the forward yen/dollar market using micro survey data. We first argue that the conventional tests of efficiency (unbiasedness) of the forward rate or of the survey forecasts do not correspond directly to the zero-profit condition. Instead, we use the survey data to calculate directly potential profits of individual forecasters based on a natural trading rule. We find that although the survey data are not the best predictor of future spot rate in terms of typical mean square forecast error criteria, the survey data can be used to obtain on average positive profits. However, these profits are small and highly variable. We also examine profits generated by a trading rule using regression forecasts, where forward premium is an explanatory variable. These profits are also small and highly variable.

Data processing system for analyzing and administering a stock investment limited-recourse borrowing contract

Abstract: A data processing system analyzes a stock investment limited recourse borrowing contract. The system receives and processes as input data on the date of analysis (1) contract data including the identity and amount of the collateral stock, the amount of the initial loan and the minimum and maximum interest rate percentages payable by the investor under the contract; (2) actual data relating to the stock prior to the analysis date including its market prices per share at selected regular intervals and the dividends per share paid in a selected number of quarters; and (3) estimated data relating to the stock from the analysis date to the end of the contract term including its estimated market price per share at intervals and the estimated dividends per share to be paid. The programmed processor processes the input data and produces as output data (1) calculated average growth rates of market prices per share and dividends per share; (2) projected amounts of interest to be paid by the investor in each period of the contract and of the amounts and timing of principal repayments to be made by the investor to the lender; and (3) projected average internal rates of return to both the investor and the lender over the life of the contract on their investments under the contract by discounting over the contract term all of the inflows and outflows of value to the investor and to the lender based on actual and projected market prices per share and dividends per share.

An econometric analysis of the market for natural gas futures

Abstract: This research tests a form of the efficient markets hypothesis in the market for natural gas futures. Unlike other studies of future markets, the test for market efficiency is conducted at numerous locations which comprise the natural gas spot market in addition to the delivery location specified in the futures contract. Natural gas spot and futures prices are found to be nonstationary and accordingly are modeled using recently developed maximum likelihood cointegrated with nearly all of the spot market prices across the national network of gas pipelines. The hypothesis of market efficiency can be rejected in 3 of the 13 spot markets. 29 refs., 1 fig., 2 tabs.

The Effect of Futures Markets and Corners on Storage and Spot Price Variability

Abstract: When a futures market is introduced, the volume of storage should become more sensitive to changes in the return to storage. The increase in storage sensitivity means that storage will absorb a larger proportion of demand and supply shocks than it did previously, reducing spot price volatility. Data from the Chicago Board of Trade support the hypotheses of increased storage sensitivity and reduced spot price volatility. The effect of futures on spot price volatility is sensitive to the competitive structure of the futures market. Futures market manipulation causes spot price variance to increase. Despite manipulation, the development of the wheat futures market caused the coefficient of variation of spot price to decline significantly.

Efficient price and capacity choices under uncertain demand: An empirical analysis

Abstract: Traditional economic analyses of the peak-load problem typically assume an unrealistic degree of regularity in demand during well-defined peak and off-peak periods. This issue is addressed through a comprehensive statistical model that separates demand into its systematic and stochastic components.

A Test of the Cost of Carry Relationship using 90‐Day Bank Accepted Bills and the All Ordinaries Share Price Index

Abstract: Cross contract regression analysis provides a framework for testing the statistical fit of the cost of carry model in the financial futures contracts, the 90‐Day Bank Accepted Bill Futures contract and the Australian All Ordinaries Share Price Index Futures contract. The interest rate to maturity is a major factor in pricing the ninety day bank accepted bill futures contract consistent with simple cost of carry model yet the cost of carry model provides little explanatory power for the share price index futures contract.

Risk arbitrage in the Nikkei put warrant market of 1989–1990

Abstract: This paper discusses the Nikkei put warrant market in Toronto and New York during 1989–1990. Three classes of long term American puts were traded which when evaluated in yen are ordinary, product and exchange asset puts, respectively. Type I do not involve exchange rates for yen investors. Type II, called quantos, fix in advance the exchange rate to be used on expiry in the home currency. Type III evaluate the strike and spot prices of the Nikkei Stock Average in the home currency rather than in yen. For typically observed parameters, type I are theoretically more valuable than type II which in turn are more valuable than type III. In late 1989 and early 1990 there were significant departures from fair values in various markets. This was a market with a set of complex financial instruments that even sophisticated investors needed time to learn about to price properly. Investors in Canada were willing to buy puts at far more than fair value based on historical volatility. In addition, US investors overpric...

Predicting the Canadian spot exchange rate with neural networks

Abstract: Reports on the feasibility of applying neural networks to the problem of forecasting the Canada/US spot exchange rate. The inputs to the network consist of the short-term trend in the spot rate (Monday-Thursday) and the change in interest rate spread between the two countries (Wednesday-Thursday). The output is a prediction of the exchange rate on Friday. The model is able to explain 6.6% of the variance in the data between November 1991 and June 1993 (out of the sample), yielding a success rate of 59% on directional forecasts.

Cointegration, error‐correction models, and forecasting using realigned foreign exchange rates

Abstract: This study employs error-correction models (ECMs) to forecast foreign exchange (FX) rates where the data-sampling procedures are consistent with the rules governing the settlement (delivery) of FX contracts in the FX market. The procedure involves thatching (aligning) the forward rate to the 'actual' realized (future) spot rate at the settlement (delivery) date. This approach facilitates the generation of five different sets of sub samples of FX rate series for each currency. For comparative purposes, non-aligned month-end rates are also examined. The results indicate that the moments of the realized forecast errors for the same currency are not similar. Further, the ECMs derived are unstable, and their forecasting performance vary. The forecasting performance of the ECMs appear to be affected by the choice of the interval in which the sets of sub samples are observed. These results are attributed to the observed seasonal variation in FX rates.

Missing risk sharing markets and the benefits of cross hedging in developing countries

Abstract: We study the impact of exchange rate risk on an exporting firm in a developing country when there is no forward market in the foreign currency. However there exists a forward traded asset in this country the price of which is highly correlated to the foreign currency. By indirectly hedging its foreign exchange exposure the firm can increase its economic welfare. Furthermore export production increases and promotes international trade of the developing country if the spot rate of foreign exchange has a regression relationship with the price of the forward traded asset.

The Peter Pan Contract - A Futures Contract that Never Matures

Abstract: One problem in using futures contracts for long-term hedging is that the contracts have to be rolled over. This entails basis risk that can significantly reduce the effectiveness of the hedge. In this paper an alternative form of futures contract is proposed. The contract never expires and can be used for long term hedging without the need for rolling over into a new contract. The contract is shown to be equivalent to a portfolio of conventional futures contracts of differing maturities. Its price is determined by arbitrage.

Arbitrage in Commodity Markets: A Full Systems Cointegration Analysis

Abstract: The study investigates long-run relationships between futures and spot prices of cocoa on the New York CSCE and London Fox, respectively, and between both markets. By means of the Johansen Maximum Likelihood approach and the inclusion of interest rates as conditioning variables, the three hypothesized cointegrating vectors are obtained. It turns out that the usage of interest rates is crucial for detecting long-run stationary relationships between spot and futures prices on individual markets. This might explain the failure of previous studies to discover cointegration between spot and futures prices on commodity markets. The existence of asymmetries in the response to deviations from equilibrium relationships is also observed: Futures prices Granger-cause spot prices, but not vice versa. This result is interpreted as evidence for spot prices to react slowly to new information.

S&P 500 futures market and the normal backwardation hypothesis

Abstract: This paper examines the behavior of near term S&P 500 index futures contract prices in the context of the theory of normal backwardation. Daily S&P 500 futures prices for 41 contracts over the 1982–1992 period are examined. There is no evidence that S&P 500 futures prices are biased estimates of the expected future spot price on expiration. Daily futures prices usually lie below the expected future spot price on expiration and usually rise over the contract period, but these price movements are not statistically significant. The surprising result of this study is the number of observations where backwardation appears not to hold. Furthermore, changes in the U.S. dollar exchange rates, the Tax Reform Act of 1986 and the switching of S&P 500 contracts quarterly expiration day had no significant effect on the behavior of S&P 500 futures prices.