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

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