LIQUIDITY, PRICE VARIABILITY, AND STORAGE ASYMMETRY: A STUDY OF THE BEHAVIOR OF PRICES IN FUTURES MARKETS.
Item
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Title
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LIQUIDITY, PRICE VARIABILITY, AND STORAGE ASYMMETRY: A STUDY OF THE BEHAVIOR OF PRICES IN FUTURES MARKETS.
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Identifier
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AAI8501159
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identifier
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8501159
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Creator
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MILONAS, NIKOLAOS T.
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Contributor
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Ashok Vora
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Date
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1984
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Language
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English
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Publisher
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City University of New York.
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Subject
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Economics, Finance
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Abstract
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The hypothesis that price variability increases as time to maturity nears provides the rationale for the so-called "maturity effect", with important implications on futures price behavior. Essay I derives the theoretical basis for this effect in line with Samuelson's (1965) arguments and investigates various non-stationary sources in spot and futures prices in three major futures markets: agricultural, financial and metals. In addition, it explores the hypothesis that near and distant contracts from maturity exhibit different price variability.;The results in Essay I support the following statements: (1) Cyclical movement of prices is the essence in commodity markets. The "month effect" is well documented in the commodities examined. (2) The non-stationary nature of the spot price generating process makes variances across years change randomly. Clearly, there is evidence of the "year effect". (3) There is virtually no "contract month effect" with financial futures, but there is with agricultural and metal futures. (4) There is a strong evidence that Samuelson's hypothesis of the "maturity effect" cannot be rejected. (5) The behavior of price variability of far-maturing contracts is commodity-dependent; we reject the hypothesis that near and far-maturing contracts behave similarly, for a given commodity.;Essay II of the study develops a common methodology with which commodities from different markets could be compared. Such comparison rests on a distinct source of illiquidity that is associated with the physical nature of the commodities traded. The impossibility of bringing a future crop into consumption today, renders a liquidity premium on nearer contracts over far-maturing contracts. Hirshleifer (1972) presents theoretically this issue of illiquidity and the problem of physical storage with some empirical implications. Since the issue of storage is not crucial for financial futures and precious metals, we do not expect liquidity premium described above in this kind of futures markets. Furthermore, the study of the different pattern of price behavior and different response to new information in futures markets will reveal the degree of "storage asymmetry" in each market.
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Type
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dissertation
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Source
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PQT Legacy CUNY.xlsx
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degree
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Ph.D.
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Program
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Business
