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Samuelson hypothesis, arbitrage activity, and futures term premiums

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  • Robert Brooks
  • Pavel Teterin

Abstract

The Samuelson hypothesis asserts that futures volatility increases as maturity decreases. On the basis of 10 US commodity futures and by capturing the dynamics of the futures volatility terms structure with three factors, we show that in most markets the slope factor is strongly negative in certain periods and at best only weakly negative in other periods. High inventory levels are found to correspond to flatter volatility term structures in seven futures. This finding is consistent with the linkage between carry arbitrage and the Samuelson hypothesis. We also find that a flatter volatility term structure corresponds to lower absolute futures term premiums.

Suggested Citation

  • Robert Brooks & Pavel Teterin, 2020. "Samuelson hypothesis, arbitrage activity, and futures term premiums," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(9), pages 1420-1441, September.
    • Handle: RePEc:wly:jfutmk:v:40:y:2020:i:9:p:1420-1441
    DOI: 10.1002/fut.22128
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    Cited by:

    1. Robert Brooks & Brandon N. Cline & Pavel Teterin & Yu You, 2022. "The information in global interest rate futures contracts," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(6), pages 1135-1166, June.
    2. Brooks, Robert & Brooks, Joshua A., 2022. "Samuelson hypothesis and carry arbitrage: U.S. and China," Journal of International Money and Finance, Elsevier, vol. 128(C).
    3. René Aid & Andrea Cosso & Huyên Pham, 2022. "Equilibrium price in intraday electricity markets," Mathematical Finance, Wiley Blackwell, vol. 32(2), pages 517-554, April.
    4. Xu, Kewei & Xiong, Xiong & Li, Xiao, 2021. "The maturity effect of stock index futures: Speculation or carry arbitrage?," Research in International Business and Finance, Elsevier, vol. 58(C).

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