Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis

Hendrik Bessembinder, Jay F. Coughenour, Paul J. Seguin, Margaret Monroe Smoller

Research output: Contribution to journalArticle

51 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)45-58
Number of pages14
JournalJournal of Derivatives
Volume4
Issue number2
DOIs
StatePublished - Dec 1 1996

Fingerprint

Term structure
Price changes
Information flow
Empirical evidence
Financial assets
Prediction
Spot price
Assets
Derivatives
Futures prices
Clustering

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

Cite this

Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis. / Bessembinder, Hendrik; Coughenour, Jay F.; Seguin, Paul J.; Smoller, Margaret Monroe.

In: Journal of Derivatives, Vol. 4, No. 2, 01.12.1996, p. 45-58.

Research output: Contribution to journalArticle

Bessembinder, Hendrik ; Coughenour, Jay F. ; Seguin, Paul J. ; Smoller, Margaret Monroe. / Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis. In: Journal of Derivatives. 1996 ; Vol. 4, No. 2. pp. 45-58.
@article{cd666c437105418a819d6cce4fdf3aa8,
title = "Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis",
abstract = "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.",
author = "Hendrik Bessembinder and Coughenour, {Jay F.} and Seguin, {Paul J.} and Smoller, {Margaret Monroe}",
year = "1996",
month = "12",
day = "1",
doi = "10.3905/jod.1996.407967",
language = "English (US)",
volume = "4",
pages = "45--58",
journal = "Journal of Derivatives",
issn = "1074-1240",
publisher = "Institutional Investor, Inc",
number = "2",

}

TY - JOUR

T1 - Is there a term structure of futures volatilities? Reevaluating the Samuelson hypothesis

AU - Bessembinder, Hendrik

AU - Coughenour, Jay F.

AU - Seguin, Paul J.

AU - Smoller, Margaret Monroe

PY - 1996/12/1

Y1 - 1996/12/1

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=85013908950&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=85013908950&partnerID=8YFLogxK

U2 - 10.3905/jod.1996.407967

DO - 10.3905/jod.1996.407967

M3 - Article

AN - SCOPUS:85013908950

VL - 4

SP - 45

EP - 58

JO - Journal of Derivatives

JF - Journal of Derivatives

SN - 1074-1240

IS - 2

ER -