Samuelson Hypothesis, Arbitrage Activity, and Futures Term Premiums

Abstract

The Samuelson hypothesis asserts that futures volatility increases as maturity decreases. Based on ten U.S. commodity futures and by capturing the dynamics of the futures volatility terms structure with three factors, we show that in most markets the slope factor is strongly negative in certain periods and at best only weakly negative in other periods. High inventory levels are found to correspond to flatter volatility term structures in seven futures. This finding is consistent with the linkage between carry arbitrage and the Samuelson hypothesis. We also find that a flatter volatility term structure corresponds to lower absolute futures term premiums.

Publication
Journal of Futures Markets
Robert E. Brooks
Robert E. Brooks
Wallace D. Malone, Jr. Professor of Financial Management

My research interests include financial derivatives, enterprise risk management, performance attribution, options, futures, swaps, and financial philosophy.