Futures contract collateralization and its implications

Robert Jarrow () and Simon S. Kwok

Journal of Empirical Finance, 2023, vol. 74, issue C

Abstract: Defining a futures return as the rate of change of futures prices, as done in many empirical studies, implicitly implies that a futures contract is fully collateralized. We adjust futures’ returns to explicitly account for the holding of minimum margin (collateral) and the return to this collateral. Collateralization adjustment affects the dynamic properties of returns and modifies the risk profile of futures contracts. In our empirical study, we document the effect of such adjustment under full and partial collateralization. The effect is minimal except when the futures prices and minimum margins are volatile. Our analysis calls for a review on the extent of diversification benefits offered by futures.

Keywords: Commodity futures; Futures return; Collateral; Leverage; Correlation (search for similar items in EconPapers)
JEL-codes: C58 G13 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:74:y:2023:i:c:s0927539823000890

DOI: 10.1016/j.jempfin.2023.101422

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