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The Long‐Term Structure of Commodity Futures
Author(s) -
Jin Na,
Lence Sergio,
Hart Chad,
Hayes Dermot
Publication year - 2012
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.1093/ajae/aar137
Subject(s) - futures contract , spot contract , economics , commodity , financial economics , term (time) , maturity (psychological) , forward market , spread trade , contango , normal backwardation , mean reversion , value (mathematics) , econometrics , finance , mathematics , statistics , institutional investor , psychology , developmental psychology , open end fund , corporate governance , physics , quantum mechanics
Futures markets on agricultural commodities typically trade with maximum maturity dates of less than four years. If these markets did trade with maturities eight or ten years distant, futures prices would have value as price forecasts and as a way to structure long‐term swaps and insurance contracts. Agricultural commodity markets generally exhibit mean reversion in spot prices and convenience yields. Spot markets also exhibit seasonality. This study develops and implements a procedure to generate long‐term futures curves from existing futures prices. Data on lean hogs and soybeans are used to show that the method provides plausible results.