Futures Price Volatility and Spot Price Stationarity: Reevaluating the Samuelson Hypothesis

Posted: 10 Oct 1998

See all articles by Hendrik Bessembinder

Hendrik Bessembinder

Arizona State University

Jay F. Coughenour

University of Delaware - Department of Finance

Paul J. Seguin

University of Minnesota - Twin Cities - Carlson School of Management

Margaret Smoller

Wayne State University

Abstract

The Samuelson hypothesis predicts that futures price volatility increases as the contract expiration date nears. We analyze the economic conditions that underlie this prediction, and highlight the crucial role of mean reverting spot prices. We show that the clustering of information flows near the delivery date is not a necessary condition. We argue that, instead, the key requirement for the Samuelson hypothesis to hold in a given market is negative covariation between spot prices and net inventory carrying costs. Such negative covariation represents a subset of the possible causes of mean reversion in the spot price, and is likely to occur in markets for real, but not financial, assets. Finally, we provide empirical evidence that the Samuelson hypothesis is supported in precisely, and only, those markets where the covariation between spot prices and estimated inventory carrying costs is significantly negative.

JEL Classification: C32, G12, G13, Q14

Suggested Citation

Bessembinder, Hendrik (Hank) and Coughenour, Jay F. and Seguin, Paul J. and Monroe Smoller, Margaret, Futures Price Volatility and Spot Price Stationarity: Reevaluating the Samuelson Hypothesis. Available at SSRN: https://ssrn.com/abstract=6295

Hendrik (Hank) Bessembinder

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Jay F. Coughenour (Contact Author)

University of Delaware - Department of Finance ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States
(302) 831-1015 (Phone)

Paul J. Seguin

University of Minnesota - Twin Cities - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
(612) 626-7861 (Phone)

Margaret Monroe Smoller

Wayne State University ( email )

Detroit, MI 48202
United States

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