FUTURES MARKETS: THE MATURITY EFFECT ON RISK AND RETURN.
Item
-
Title
-
FUTURES MARKETS: THE MATURITY EFFECT ON RISK AND RETURN.
-
Identifier
-
AAI8203271
-
identifier
-
8203271
-
Creator
-
CASTELINO, MARK GREGORY.
-
Contributor
-
Prof. Jack Clark Francis
-
Date
-
1981
-
Language
-
English
-
Publisher
-
City University of New York.
-
Subject
-
Business Administration, General
-
Abstract
-
The volatility of changes in futures prices increases as contract maturity is approached. Holders of futures contracts are thus bearing increasing levels of risk on a per day or per week basis, closer to maturity than further away from it. This proposition was first rigorously derived in a seminal paper put forth by Paul A. Samuelson in 1965. This dissertation follows through on the theoretical and empirical implications of that proposition.;The first question posed in this dissertation is on the behavior of returns to holders of futures contracts. If hedgers are net short and speculators are net long, risk aversion on the part of market participants would necessarily imply that returns should increase commensurately over the life of the same contract. The existence of returns to holders of futures contracts, in turn, necessarily implies that futures prices must be biased estimates of expected spot prices at maturity. If a systematic maturity effect exists for volatility as well as for returns, should there exist a risk-return ratio that is independent of the time left to maturity? Should this risk-return ratio vary from commodity to commodity? These are some of the questions on futures price behavior that are answered both theoretically as well as empirically in this dissertation.;The next set of propositions put forth and analysed is on the behavior of the basis. If futures price changes become increasingly volatile as contract maturity is approached, then the volatility of changes in the basis must necessarily decline as the maturity of the selected contract is approached. A corollary that follows is that a basis with respect to a nearer future must necessarily be less volatile than one with respect to a more distant one. These propositions are interesting because they imply that if risk reduction is the leitmotiv for hedging, then the nearer future is the preferred choice with which to achieve the objective than a more distant one.;Finally the behavior of spreads are analysed. The behavior of a spread follows directly from both, futures price as well as basis behavior. Two propositions on spread volatility are derived. The first is that the volatility of changes in a spread declines as the maturity of the nearer contract is approached. The second is that the volatility of changes in a spread is a function of its length. In other words, a one month spread is less volatile than a two month spread or a six month spread. Spread behavior thus closely follows basis behavior. This is not surprising, as a spread is simply a basis, where both positions taken in the market are in futures contracts rather than one in futures and one in spot.;The various propositions from futures price volatility to spread volatility are empirically tested for a wide cross-section of commodities from the seasonal and storable type such as wheat to the storable and industrial type such as copper. The propositions are supported overwhelmingly in almost every case. There seems to exist thus, a very stong case for a maturity effect for the securities in futures markets.
-
Type
-
dissertation
-
Source
-
PQT Legacy CUNY.xlsx
-
degree
-
Ph.D.
-
Program
-
Business
