Does Futures Exhibit Maturity Effect? New Evidence from an Extensive Set of Us and Foreign Futures Contracts

Posted: 16 May 2009

See all articles by Elton Daal

Elton Daal

University of New Orleans - College of Business Administration - Department of Economics and Finance

Joseph B. Farhat

Central Connecticut State University - Department of Finance

Peihwang Wei

University of New Orleans - College of Business Administration - Department of Economics and Finance

Date Written: May 16, 2006

Abstract

In a seminal article, Samuelson (1965) [Samuelson, P. A. (1965), “Proof that properly anticipated prices fluctuate randomly,” Industrial Management Review 6, 41–49.] proposes the maturity effect that the volatility of futures prices should increase as futures contract approaches maturity. This study provides new evidence on the maturity effect by examining a more extensive set of futures contracts than previous studies and analyzing each contract separately. Using 6805 futures contracts drawn from 61 commodities, including some data from non-US markets, we find that the maturity effect is absent in the majority of contracts. In addition, the maturity effect tends to be stronger in agricultural and energy commodities than in financial futures. We also examine the hypothesis in Bessembinder et al. (1996) [Bessembinder, H., J. F. Coughenour, P. J. Seguin, & M. M. Smoller (1996), “Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis,” Journal of Derivatives 4, 45–58.], which states that negative covariance between the spot price and net carry cost causes the maturity effect in futures. Our results provide very weak evidence in favor of this hypothesis.

Keywords: Maturity effect, Futures prices volatility, Futures markets

JEL Classification: C32, G12, G13, Q14

Suggested Citation

Daal, Elton and Farhat, Joseph and Wei, Peihwang, Does Futures Exhibit Maturity Effect? New Evidence from an Extensive Set of Us and Foreign Futures Contracts (May 16, 2006). Review of Financial Economics, Vol. 15, No. 2, 2006, Available at SSRN: https://ssrn.com/abstract=1405663

Elton Daal

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States
504-280-6270 (Phone)

Joseph Farhat

Central Connecticut State University - Department of Finance ( email )

1615 Stanley Street
New Britian, CT 06050
United States

Peihwang Wei (Contact Author)

University of New Orleans - College of Business Administration - Department of Economics and Finance ( email )

2000 Lakeshore Drive
New Orleans, LA 70148
United States
(504) 280-6602 (Phone)

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