Hostname: page-component-586b7cd67f-tf8b9 Total loading time: 0 Render date: 2024-11-27T23:07:30.269Z Has data issue: false hasContentIssue false
  • English
  • Français

Delivery Uncertainty and the Efficiency of Futures Markets

Published online by Cambridge University Press:  06 April 2009

Avraham Kamara
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the effects of the delivery basis risk embedded in nearly all futures contracts on efficiency tests of these markets. Examining soybean futures contracts, we show that delivery basis risk has important implications for market efficiency tests. Assuming no delivery basis risk, the market efficiency hypothesis is rejected. However, futures prices contain significant time-varying expected delivery basis and time-varying expected delivery risk premiums. Once these expected delivery basis and delivery risk premiums are accounted for, the apparent inefficiency is eliminated. Equilibrium spot prices also contain significant time-varying expected delivery risk premiums.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 25 , Issue 1 , March 1990 , pp. 45 - 64
Copyright
Copyright © School of Business Administration, University of Washington 1990

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel, A. B., and Mishkin, F. S.. “On the Econometric Testing of Rationality Market Efficiency.” Review of Economics and Statistics, 65 (05 1983), 318–323.CrossRefGoogle Scholar
Allingham, M. “Intertemporal Efficiency in the Grain Markets.” Working Paper #CSFM–56, Columbia Futures Center (05 1983).Google Scholar
Anderson, R. W. “Some Determinants of the Volatility of Futures Prices.” Journal of Futures Markets, 5 (Fall 1985), 331–348.CrossRefGoogle Scholar
Anderson, R. W., and Danthine, J-P.. “Cross Hedging.” Journal of Political Economy, 89 (12. 1981), 1182–1196.CrossRefGoogle Scholar
Boyle, P. P. “The Quality Option and the Timing Option in Futures Contracts.” Journal of Finance, 44 (03 1989), 101–113.CrossRefGoogle Scholar
Brennan, M. J. “The Supply of Storage.” American Economic Review, 48 (03 1958), 503–572.Google Scholar
Broadie, M., and Sundaresan, S.. “The Pricing of Timing and Quality Options: An Application to Treasury Bond and Treasury Note Futures Markets.” Working Paper, Columbia Univ. (10. 1988).Google Scholar
Chicago Board of Trade. Statistical Annual. Chicago: Chicago Board of Trade (various issues, 1970 through 1982).Google Scholar
Dickey, D. A., and Fuller, W. A.. “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root.” Econometrica, 49 (07 1981), 1057–1072.CrossRefGoogle Scholar
Dusak, K. “Futures Trading and Investor Return: An Investigation of Commodity Market Risk Premiums.” Journal of Political Economy, 81 (11./12. 1973), 1387–1406.CrossRefGoogle Scholar
Ederington, L. H. “The Hedging Performance of the New Futures Markets.” Journal ofFinance, 34 (03 1979), 157–170.CrossRefGoogle Scholar
Elton, E. J.; Gruber, M. J.; and Rentzler, J.. “Intra-day Test of the Efficiency of the Treasury Bill Futures Market.” Review of Economics and Statistics, 66 (02. 1984), 129–137.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Commodity Futures Prices: Some Evidence on Forecast Power, Premiums, and the Theory of Storage.” Journal of Business, 60 (01. 1987), 55–73.CrossRefGoogle Scholar
French, K. R. “A Comparison of Futures and Forward Prices.” Journal of Financial Economics, 12 (11. 1983), 311–344.CrossRefGoogle Scholar
Garbade, K. D., and Silber, W. L.. “Futures Contracts on Commodities with Multiple Varieties: An Analysis of Premiums and Discounts.” Journal of Business, 56 (07 1983), 269–272.Google Scholar
Gay, G. D., and Manaster, S.. “The Quality Option Implicit in Futures Contracts.” Journal of Financial Economics, 13 (09. 1984), 353–370.CrossRefGoogle Scholar
Gay, G. D., and Manaster, S. “Implicit Delivery Options and Optimal Delivery Strategies for Financial Futures Contracts.” Journal of Financial Economics, 16 (05 1986), 41–72.CrossRefGoogle Scholar
Hieronymus, T. A. “Basis Patterns.” In Readings in Futures Markets, Book III, Views from the Trade, Peck, A. E., ed. Chicago, IL: Chicago Board of Trade (1978).Google Scholar
Hirshleifer, D. “Residual Risk, Trading Costs, and Commodity Futures Risk Premia.” Review of Financial Studies, 1 (Summer 1988), 173–193.CrossRefGoogle Scholar
Hemler, M. L. The Quality Delivery Option in Treasury Bond Futures Contracts. Ph.D. Diss., Univ. of Chicago (1986).Google Scholar
Kamara, A. “Issues in Futures Markets: A Survey.” Journal of Futures Markets, 2 (Fall 1982), 261–294.CrossRefGoogle Scholar
Kamara, A., and Siegel, A. F.. “Optimal Hedging in Futures Markets with Multiple Delivery Specifications.” Journal of Finance, 42 (09. 1987), 1007–1021.CrossRefGoogle Scholar
Kane, A., and Marcus, A. J.. “Valuation and Optimal Exercise of the Wild Card Option in the Treasury Bond Futures Market.” Journal of Finance, 41 (03 1986a), 195–207.CrossRefGoogle Scholar
Kane, A., and Marcus, A. J.. “The Quality Option in the Treasury Bond Futures Market: An Empirical Assessment.” Journal of Futures Markets, 6 (Summer 1986b), 231–248.CrossRefGoogle Scholar
Kilcollin, T. E. “Difference Systems in Financial Futures Markets.” Journal of Finance, 37 (12. 1982), 1183–1197.CrossRefGoogle Scholar
Muth, J. F. “Rational Expectations and the Theory of Price Movements.” Econometrica, 29 (07 1961), 315–335.CrossRefGoogle Scholar
Pagan, A. “Econometric Issues in the Analysis of Regressions with Generated Regressors.” International Economic Review, 25 (02. 1984), 221–247.CrossRefGoogle Scholar
Rausser, G. C, and Carter, C.. “Futures Market Efficiency in the Soybean Complex.” Review of Economics and Statistics, 65 (08. 1983), 469–478.CrossRefGoogle Scholar
Silber, W. L. “Innovation, Competition, and New Contract Design in Futures Markets.” Journal of Futures Markets, 2 (Summer 1981), 123–155.CrossRefGoogle Scholar
Silber, W. L. “The Econo1mic Role of Financial Futures” In Futures Markets: Their Economic Role, Peck, A. E., ed. Washington, D.C.: American Enterprise Institute for Public Policy (1985).Google Scholar
Stein, J. L. “The Simultaneous Determination of Spot and Futures Prices.” American Economic Review, 51 (12. 1961), 1012–1025.Google Scholar
Stein, J. L. “Spot, Forward and Futures.” Research in Finance, 1 (1979), 225–310.Google Scholar
Stein, J. L. “Speculative Price: Economic Welfare and the Idiot of Chance.” Review of Economics and Statistics, 63 (05 1981), 223–232.CrossRefGoogle Scholar
Stoll, H. R. “Commodity Futures and Spot Price Determination and Hedging in Capital Market Equilibrium.” Journal of Financial and Quantitative Analysis, 14 (11. 1979), 873–894.CrossRefGoogle Scholar
Working, H. “Theory of the Inverse Carrying Charge in Futures Markets.” Journal of Farm Economics, 30 (02 1948), 1–28.CrossRefGoogle Scholar
Working, H. “Speculation on Hedging Markets.” Food Research Institute Studies, 1 (05 1960), 185–220.Google Scholar