Financial Frictions and the Futures Pricing Puzzle

Rhys ap Gwilym, M. Shahid Ebrahim (), AbdelKader EL Alaoui, Hamid Rahman and Abderrahim Taamouti
Additional contact information
Hamid Rahman: Alliant International University

No 2019_07, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: In perfect capital markets, the futures price of an asset should be an unbiased forecast of its realized spot price when the contract matures. In reality, futures prices are often higher for some assets and lower for others. However, there is no stability in the relationship between futures prices and the realized spot prices. This instability has been a puzzle in the existing financial literature. The key to this puzzle may lie in the nature of the model and the lack of market imperfections. In this study, we take a theoretical approach in a dynamic multi-period environment. We incorporate competition between disparate economic agents and impose financial frictions (i.e., imperfections) that are in the form of hedging and borrowing limits on them. Our model gives rise to multiple equilibria, each with unique market clearing prices, with the market switching between these equilibria. Our analysis incorporates a comprehensive consideration of the risks faced by the futures markets participants (i.e., speculators and hedgers) and leads to a better understanding of the puzzle.

Keywords: Futures Pricing; Contango; Financial Frictions; Normal Backwardation. (search for similar items in EconPapers)
JEL-codes: D58 D74 G13 N20 (search for similar items in EconPapers)
Date: 2019-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.dur.ac.uk/resources/business/research/EconWP19_07.pdf main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
Journal Article: Financial frictions and the futures pricing puzzle (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:dur:durham:2019_07

Access Statistics for this paper

More papers in Department of Economics Working Papers from Durham University, Department of Economics Durham University Business School, Mill Hill Lane, Durham DH1 3LB, England. Contact information at EDIRC.
Bibliographic data for series maintained by Tatiana Damjanovic ().