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Does futures exhibit maturity effect? New evidence from an extensive set of US and foreign futures contracts

Elton Daal, Joseph Farhat and Peihwang Wei
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Elton Daal: University of New Orleans
Joseph Farhat: Hashemite University
Peihwang Wei: University of New Orleans

No 2004-03, Working Papers from University of New Orleans, Department of Economics and Finance

Abstract: In a seminal article, Samuelson (1965) proposes the maturity effect that volatility of futures prices should increase as futures contract approaches maturity. This study provides new evidence on the maturity effect by examining a more extensive set of futures contracts than previous studies and analyzing each contract separately. Using 6805 futures contracts drawn from 61 commodities, including some data from non-US markets, we find that the maturity effect is absent in the majority of contracts. In addition, the maturity effect tends to be stronger in agricultural and energy commodities than in financial futures. We also examine the hypothesis in Bessembinder, Coughenour, Seguin, and Smoller (1996), which states that negative covariance between the spot price and net carry cost causes the maturity effect in futures. Our results provide very weak evidence in favor of this hypothesis.

Keywords: Maturity effect; Futures prices volatility; Futures markets (search for similar items in EconPapers)
JEL-codes: C32 G12 G13 Q14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk
Date: 2004
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