The Term Structure of Futures Premiums

Stuart School of Business research presentation by: Associate Professor of Finance Ricky Cooper and Marat Molyboga, Ph.D., chief research officer, Efficient Capital Management

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Locations

Virtual—Online

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The Term Structure of Futures Premiums

  • Associate Professor of Finance Ricky Cooper
  • Marat Molyboga, Ph.D., chief research officer, Efficient Capital Management

Abstract:

Previous literature has documented that futures contracts did not have a risk premium associated with differing maturities before 2003, but did after that. This paper develops a theoretical model of financialization in the futures markets that explains this behavior in terms of indexing behavior, and basis risk incurred by agent’s attempting to arbitrage the resulting price distortions. We find that by analyzing futures data the predictions of our model are confirmed. Moreover, an independent government data set confirms that the positions of indexers in the market are directly correlated with the premiums observed in the market. This model and the data analyzed are the first treatment of this topic to appear in the literature.

 

The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty, as well as research presentations made by faculty at other leading business schools.

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