Is There a Term Structure of Futures Volatilities? Reevaluating the Samuelson Hypothesis

28 Pages Posted: 7 Nov 1996

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 implies that the volatility of futures price changes increases as a contract's delivery date nears. In markets where the Samuelson hypothesis holds, accurate valuation of options and related derivatives on futures requires that a term structure of futures volatilities be estimated. We develop a framework for predicting those markets where the hypothesis should be expected to hold. In contrast to a prominent reinterpretation of the hypothesis, we show that clustering of information flows near the delivery date is not necessary. We show instead that the hypothesis will be supported in markets where spot price changes contain a predictable temporary component, and we argue that this condition is much more likely to be supported in markets for real assets than for financial assets. Finally, we provide empirical evidence consistent with our predictions.

JEL Classification: G13

Suggested Citation

Bessembinder, Hendrik (Hank) and Coughenour, Jay F. and Seguin, Paul J. and Monroe Smoller, Margaret, Is There a Term Structure of Futures Volatilities? Reevaluating the Samuelson Hypothesis. Available at SSRN: https://ssrn.com/abstract=666 or http://dx.doi.org/10.2139/ssrn.666

Hendrik (Hank) Bessembinder (Contact Author)

Arizona State University ( email )

PO Box 873906
Tempe, AZ 85207
United States

Jay F. Coughenour

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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