Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Bessembinder, Hendrik; Coughenour, Jay F.; Seguin, Paul J.; Smoller, Margaret Monroe

doi:10.1111/j.1540-6261.1995.tb05178.x

Cited by 301 publications

(171 citation statements)

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“…Fama, 1984a,b,c, 1986, Fama & French, 1987 or on the interaction of yields and spot prices (e.g. Fama & French, 1988, Bessembinder et al, 1995a, rather than on the yields themselves, as we do here. In the next section we will show that in a simple one-factor model for the term structure of yields, the covariances of the yields with the pricing kernel can be derived from the term structure of futures prices.…”

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confidence: 58%

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Pricing Term Structure Risk in Futures Markets

Roon¹,

Nijman²,

Veld³

1998

The Journal of Financial and Quantitative Analysis

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One-period expected returns on futures contracts with different maturities differ because of risk premia in the spreads between futures and spot prices. We analyze the expected returns for futures contracts with different maturities using the information that is present in the current term structure of futures prices. A simple affine one-factor model that implies a constant covariance between the pricing kernel and the cost-of-carry can not be rejected for heating oil and German Mark futures contracts. For gold and soybean futures the risk premia depend on the slope of the current term structure of futures prices, while for live cattle futures the evidence is mixed.

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confidence: 58%

“…A related part of the literature focuses on the relation between yields and spot price changes (see e.g. Fama & French, 1988, Bessembinder et al, 1995a, but it does not consider the yields and yield changes themselves. The aim here is to fill this gap.…”

Section: Introductionmentioning

confidence: 99%

Pricing Term Structure Risk in Futures Markets

Roon¹,

Nijman²,

Veld³

1998

The Journal of Financial and Quantitative Analysis

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“…The second source of risk premium in futures markets arises from the term structure of futures prices leading to term premiums. These have been studied 5,6 more recently by Harvey and Erb 2 , who suggest that the 'roll return' that arises as a result of the shape of the term structure of futures prices explains much of the variation in expected returns across a wide range of commodities. The third source of risk premium is hedging demand by producers, following the hedging pressure hypothesis of Keynes.…”

Section: Timing Commodity Markets Using Risk Premiumsmentioning

confidence: 99%

How to time the commodities markets

Basu

Oomen²,

Stremme³

2010

J Deriv Hedge Funds

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Devraj Basuis an associate professor of Finance at EDHEC Business School. A mathematician by training, his interests in finance focus on continuous time finance and asset pricing. Currently, his research focuses on trying to explain the risk premium across several asset classes and his more applied work focuses on constructing real-time trading strategies that attempt to capture these risk premiums. Roel Oomenworks at Deutsche Bank. He holds a PhD from the European University Institute in Florence and was a faculty member in the Finance Group at the Warwick Business School. His interests are in the areas of market microstructure and high-frequency finance. Alexander Stremmeworks in the Finance Group at the Warwick Business School. He holds a PhD from the London School of Economics (LSE) and has taught in LSE and the Stern School of Business at New York University. His interests lie in the areas of asset pricing and derivative securities.Correspondence: Devraj Basu, EDHEC Business School, 393-400 Promenade des Anglais, Nice 06202, France E-mail: devraj.basu@edhec.edu ABSTRACT In this article we construct and investigate the performance of elementary trading strategies that allow an investor to time between equities and commodities. Our strategies appear to capture time-varying risk premiums in the equity and commodity markets, enabling them to successfully time the market, outperforming the benchmark index as well as buy-and-hold and trend-based strategies.

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“…There is also empirical research that supports this claim. For example Bessembinder et al (1995) find support for meanreversion in commodity prices by comparing the sensitivity of long-maturity futures prices to changes in spot prices.…”

Section: Modeling Commodity Prices: An Overview Of Selected Literaturementioning

confidence: 99%

Regime switching in stochastic models of commodity prices: An application to an optimal tree harvesting problem

Shan

Insley

2012

Journal of Economic Dynamics and Control

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This paper investigates whether a regime switching model of stochastic lumber prices is better for the analysis of optimal harvesting problems in forestry than a more traditional single regime model. Prices of lumber derivatives are used to calibrate a regime switching model, with each of two regimes characterized by a different mean reverting process. A single regime, mean reverting process is also calibrated. The value of a representative stand of trees and optimal harvesting prices are determined by specifying a Hamilton-JacobiBellman Variational Inequality, which is solved for both pricing models using a fully implicit finite difference approach. The regime switching model is found to more closely match the behaviour of futures prices than the single regime model. In addition, analysis of a tree harvesting problem indicates significant differences in terms of land value and optimal harvest thresholds between the regime switching and single regime models.JEL Classification: C63, C61, Q23, D81

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Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Cited by 301 publications

References 14 publications

Pricing Term Structure Risk in Futures Markets

Pricing Term Structure Risk in Futures Markets

How to time the commodities markets

Regime switching in stochastic models of commodity prices: An application to an optimal tree harvesting problem

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