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 futures-related derivatives requires that a term structure of futures volatilities be estimated. We develop a framework for predicting the markets where the Samuelson hypothesis should be expected to hold. Unlike a prominent reinterpretation of the hypothesis, our work shows that clustering of information flows near the delivery date is not a necessary condition. We show instead that the hypothesis is generally supported in markets where spot price changes include a predictable temporary component; we argue that this condition is much more likely to be met in markets for real assets than for financial assets. Finally, we provide empirical evidence consistent with our predictions.
ASJC Scopus subject areas
- Economics and Econometrics