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Comparing alternative assumptions on the term structure of futures prices: Reply
Author(s) -
De Roon Frans A.,
VeldMerkoulova Yulia V.
Publication year - 2004
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.20130
Subject(s) - futures contract , term (time) , economics , econometrics , lien , order (exchange) , financial economics , mathematical economics , finance , physics , quantum mechanics
Abstract Donald Lien and Yan Wang (this issue) suggest an alternative test for different specifications of the term structure of futures prices, as used in our recently published paper in The Journal of Futures Markets. Our paper (Y. V. Veld‐Merkoulova and F. A. de Roon, 2003) focuses on developing optimal hedging strategies in case sufficiently long‐term futures contracts are not available (or not actively traded) on the exchange. One of the preliminary steps underlying this strategy was to compare linear and log‐linear term structures of futures prices in order to choose an appropriate specification. Although this is not the main issue of our paper, it is certainly important to use the correct econometric procedure in testing alternative model specifications. The results found by Lien and Wang do not contradict our conclusion that a linear term structure of futures yields is superior to a linear term structure of futures prices. However, as we point out here, the tests suggested by Lien and Wang are not without flaws. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:1101–1104, 2004