Contract modifications and the basis behavior of live cattle futures

Abstract

1Purcell and Hudson (1985) present an example using expected basis and futures prices to form a forecast for expected future spot price (see pp. 337-338). Within a regression model with heteroskedascity error framework, we found that the level of nearby basis in the period after June 1995 has shifted lower and the average monthly open interest of net commercial long positions has substantially increased after the contract modifications. These empirical results are consistent with the notion that more long activity entered the market in response to the contract modifications. Additionally, an alternative (new) measure of basis calculation (cash price minus weighted mean futures price) produced similar results to two other commonly used measures. In conclusion, the 1995 contract changes have neither increased nor decreased the volatility of live cattle basis.

Asymmetric effect of basis on dynamic futures hedging: Empirical evidence from commodity markets

“…In addition, spot prices across different locations of trading might not be the same and therefore the basis could differ across these locations. More discussion of using the price of futures contract with the closest-to-maturity as a proxy of spot price can be found in French (1987, 1988), Gibson and Schwartz (1990) and Schwartz (1997), and Newsome et al (2004). 7 For comparison, daily average trading volumes of the nearest-tomaturity contracts for each of the commodities are 86578, 77034, 2682, 2747, 2746, 3335, 9145, 34414, 3193, and 9686, respectively.…”