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Pricing Term Structure Risk in Futures Markets

Published online by Cambridge University Press:  09 June 2010

Frans A. de Roon ,
Theo E. Nijman  and
Chris Veld
Frans A. de Roon
Affiliation:
Department of Finance, Erasmus University Rotterdam, The Netherlands
Theo E. Nijman
Affiliation:
CentER for Economic Research, Department of Econometrics and Department of Business Administration, respectively, Tilburg University, The Netherlands.
Chris Veld
Affiliation:
CentER for Economic Research, Department of Econometrics and Department of Business Administration, respectively, Tilburg University, The Netherlands.
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Abstract

One-period expected returns on futures contracts with different maturities differ because of risk premia in the spreads between futures and spot prices. We analyze the expected returns for futures contracts with different maturities using the information that is present in the current term structure of futures prices. A simple affine one-factor model that implies a constant covariance between the pricing kernel and the cost-of-carry cannot be rejected for heating oil and German Mark futures contracts. For gold and soybean futures, the risk premia depend on the slope of the current term structure of futures prices, while for live cattle futures, the evidence is mixed.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 33 , Issue 1 , March 1998 , pp. 139 - 157
Copyright
Copyright © School of Business Administration, University of Washington 1998

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