Testing Futures Returns Predictability: Implications for Hedgers

28 Pages Posted: 9 Nov 2007

See all articles by Piet Sercu

Piet Sercu

FEB at KU Leuven

Geert Dhaene

KU Leuven - Department of Economics

Cédric de Ville de Goyet

KU Leuven

Date Written: February 5, 2007


The predictability of futures returns is investigated using a semiparametric approach where it is assumed that the expected returns depend non parametrically on a combination of predictors. We first collapse the forecasting variables into a single index variable where the weights are identified up to scale, using the average derivative estimator proposed by Stoker (1986). We then use the Nadaraya-Watson kernel estimator to calculate (and visually depict) the relation between the estimated index and the expected futures returns. An application to four agricultural commodity futures illustrates the technique. The results indicate that for each of the commodities considered, the estimated index contains statistically significant information regarding the expected futures returns. Economic implications for a non-infinitely risk averse hedger are also discussed.

Keywords: Average derivative estimates, Futures market, Hedging, Futures, IT, Expected, Forecasting, Variables, Indexes, Estimator, Information, Implications, Risk

JEL Classification: G11, G14, C14

Suggested Citation

Sercu, Piet M. F. A. and Dhaene, Geert and de Ville de Goyet, Cédric, Testing Futures Returns Predictability: Implications for Hedgers (February 5, 2007). Available at SSRN: https://ssrn.com/abstract=1028503 or http://dx.doi.org/10.2139/ssrn.1028503

Piet M. F. A. Sercu

FEB at KU Leuven ( email )

Naamsestraat 69
Faculty of Economics and Business
Leuven, 3000
+32 16 32 67 56 (Phone)
+32 16 32 67 32 (Fax)

Geert Dhaene (Contact Author)

KU Leuven - Department of Economics ( email )

Leuven, B-3000

Cédric De Ville de Goyet

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000

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