Abstract
A recent study shows that separation theorems in the stock and forward market literatures may not hold in an integrated financial market; therefore, the securities market may influence futures trading. This article investigates the securities market influence on the futures price. The result shows that although the futures price incorporates the investor's expectation about the future spot price, it generally is not a best estimate of the spot price. In addition, it is shown that the speculative activity can destabilize the cash market for some commodities, if initially, the underlying cash price is highly volatile.
Similar content being viewed by others
References
Alberts, W.W. and G.L.Hite, “The Modigliani-Miller Leverage Equation Considered in a Product Market Context.”Journal of Financial and Quantitative Analysis 18(4), 425–437 (December 1983).
Booth, L.D., “Market Structure Uncertainty and the Cost of Capital: A Clarification.”Journal of Banking and Finance 5, 467–482 (1981).
Breeden, D.T., “Consumption Risk in Futures Markets.”Journal of Finance 35, 503–520 (1980).
Britto, R., “The Simultaneous Determination of Spot and Futures Prices in a Simple Model with Production Risk.”Quarterly Journal of Economics 98(3), 351–365 (May 1984).
Carter, C.A., G.C.Rausser, and A.Schmitz, “Efficient Asset Portfolios and the Theory of Normal Backwardation.”Journal of Political Economy 91, 319–331 (April 1983).
Dusak, K., “Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums.”Journal of Policitcal Economy 81, 1387–1406 (Nov–Dec 1981).
Fama, E.F. and K.R.French, “Commodity Futures Prices: Some Evidence on Forecast Power, Premiums and the Theory of Storage.”Journal of Business 60(1), 55–72 (1987).
Fama, E.F. and A.B.Laffer, “The Number of Firms and Competition.”American Economic Review 62(4), 670–674 (September 1972).
Feder, G., R.E.Just, and A.Schmitz, “Futures Markets and the Theory of the Firm under Price Uncertainty.”Quarterly Journal of Economics 94(2), 247–263, (March 1980).
Figlewski, S., “Information Diversity and Market Behavior.”Journal of Finance 37, 87–102 (March 1982).
French, K.R., “Detecting Spot Price Forecasts in Futures Prices.”Journal of Business 59(2), S39-S54 (1986).
Hart, O.D. and D.M.Kreps, “Price Destabilizing Speculation.”Journal of Political Economy 94(5), 927–952 (October 1986).
Holthausen, D.M., “Hedging and the Competitive Firm under Price Uncertainty.”American Economic Review 69(5), 989–995 (December 1979).
Heckerman, D.G., “Portfolio Analysis, Market Equilibrium and Corporation Finance.”The Journal of Finance 24, 13–31 (March 1969).
Hicks, J.R.,Value and Capital, An Inquiry Into Some Fundamental Principles of Economic Theory, second edition. London, England: Oxford University Press, 1946.
Hite, G.L., “Leverage, Output Effects and the M-M Theorems.”Journal of Financial Economics 4, 177–202 (March 1977).
Keynes, J.M.,A Treatise on Money, Vol. 2. London: Macmillan, 1930.
Long, M.S. and G.A.Racette, “Stochastic Demand, Output and the Cost of Capital.”Journal of Finance 24(2), 499–506 (May 1974).
MacMinn, R.D., “Forward Markets, Stock Markets, and the Theory of the Firm.”Journal of Political Economy 95(6), 1123–1145 (December 1987).
Sandmo, A., “On the Theory of the Competitive Firm under Proce Uncertainty.”American Economic Review 61, 61–73 (March 1971).
Stein, J.C., “Informational Externalities and Welfare-Reducing Speculation.”Journal of Political Economy 95(6), 1123–1145 (December 1987).
Subrahmanyam, M.G. and S.B.Thomadakis, “Systematic Risk and the Theory of the Firm.”Quarterly Journal of Economics 94(3), 437–451 (May 1980).
Turnovsky, S.J., “The Determination of Spot and Futures Prices with Storable Commodities.”Econometrica 51(5), 1363–1387 (September 1983).
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Deans, R.H., Rhee, T.A. The equilibrium price of futures contracts: A result drawn from capital asset pricing model. Rev Quant Finan Acc 2, 259–272 (1992). https://doi.org/10.1007/BF00586438
Issue Date:
DOI: https://doi.org/10.1007/BF00586438