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THE EFFECT OF TRADING FUTURES ON SHORT SALE CONSTRAINTS
Author(s) -
Jarrow Robert,
Protter Philip,
Pulido Sergio
Publication year - 2015
Publication title -
mathematical finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.98
H-Index - 81
eISSN - 1467-9965
pISSN - 0960-1627
DOI - 10.1111/mafi.12013
Subject(s) - futures contract , semimartingale , spot contract , commodity , arbitrage , commodity pool , spot market , contango , economics , financial economics , algorithmic trading , replicate , forward market , microeconomics , finance , incentive , mathematics , engineering , electricity , passive management , fund of funds , electrical engineering , statistics
It is commonly believed that the trading of futures on a commodity enables the market to overcome short selling constraints on the spot commodity itself. This belief is embedded in the notion that trading strategies involving futures contracts enable traders to replicate the payoffs as if they were short the spot commodity. The purpose of this paper is to investigate this common belief in a general arbitrage‐free semimartingale financial model with trading in futures and a short selling prohibition on the spot commodity. We show via various examples that, in general, this common belief is incorrect. Furthermore, we provide a set of sufficient conditions, albeit very restrictive, under which the common belief is true.