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This study seeks to determine whether changes in future prices are determined by the shifting of price risk and the presence of risk premiums in transactions between hedgers and speculators. The alternative explanation is that the returns accruing to speculators are a result of the superior forecasting ability processed by speulators. The study examines the characteristics of price movements and net hedging positions in twenty‐nine futures markets.The results of the study are consistent with the presence of both risk shifting to speculators and superior forecasting ability of speculators in futures markets. While the risk bearing explanation may be valid for particular markets under special conditions, forecasting ability may be present in other markets.The implication is useful for investors in determining which markets may reflect ongoing and unidirectional price changes.

The issue of risk premium in commodity futures market has long been examined since Keynes’ (1930) normal backwardation hypothesis. We further examine the normal backwardation hypothesis in the gold futures market, using a Goldman Sachs Commodity Index (GSCI) approach. We find no evidence that risk premium exists in the gold futures market over the period 1980–2005. Finally, we provide further explanations as to why there is no risk premium in the gold futures market by investigating the actual gold futures positions taken by gold mining firms. We contend that lack of hedging activity by gold miners may explain the lack of risk premium in gold market.

This chapter develops a no-arbitrage, futures equilibrium cost-of-carry model to demonstrate that the existence of cointegration between spot and futures prices in the New York Mercantile Exchange (NYMEX) crude oil market depends crucially on the time-series properties of the underlying model. In marked contrast to previous studies, the futures equilibrium model utilizes information contained in both the quality delivery option and convenience yield as a timing delivery option in the NYMEX contract. Econometric tests of the speculative efficiency hypothesis (also termed the “unbiasedness hypothesis”) are developed and common tests of this hypothesis examined. The empirical results overwhelming support the hypotheses that the NYMEX future price is an unbiased predictor of future spot prices and that no-arbitrage opportunities are available. The results also demonstrate why common tests of the speculative efficiency hypothesis and simple arbitrage models often reject one or both of these hypotheses.

Since the introduction of VIX to measure the spot volatility in the stock market, VIX and its futures have been widely considered to be the standard of underlying investor sentiment. This study aims to examine how the magnitude of contango or backwardation (MCB volatility risk factor) derived from VIX and VIX3M may affect the pricing of assets.

This paper focuses on the statistical inference of three defined MCB risk factors when cross-examined with Fama–French’s five factors: the market factor R_m–R_f, the size factor SMB (small minus big), the value factor HML (high minus low B/M), the profitability factor RMW (robust minus weak) and the investing factor CMA (conservative minus aggressive). Robustness checks are performed with the revised HML-Dev factor, as well as with daily data sets.

The inclusions of the MCB volatility risk factor, either defined as a spread of monthly VIX3M/VIX and its monthly MA(20), or as a monthly net return of VIX3M/VIX, generally enhance the explanatory power of all factors in the Fama and French’s model, in particular the market factor R_m–R_f and the value factor HML, and the investing factor CMA also displays a significant and positive correlation with the MCB risk factor. When the more in-time adjusted HML-Dev factor, suggested by Asness (2014), replaces the original HML factor, results are generally better and more intuitive, with a higher R² for the market factor and more explanatory power with HML-Dev.

This paper introduces the term structure of VIX to Fama–French’s asset pricing model. The MCB risk factor identifies underlying configurations of investor sentiment. The sensitivities to this timing indicator will significantly relate to returns across individual stocks or portfolios.

The authors analyse six actively traded VIX Exchange Traded Products (ETPs) including 1x long, −1x inverse and 2x leveraged products. The authors assess their impact on the VIX Futures index benchmark.

Long-run causal relations between daily price movements in ETPs and futures are established, and the impact of rebalancing activity of leveraged and inverse ETPs evidenced through causal relations in the last 30 min of daily trading.

High frequency lead lag relations are observed, demonstrating opportunities for arbitrage, although these tend to be short-lived and only material in times of market dislocation.

The causal relations between VXX and VIX Futures are well established with leads and lags generally found to be short-lived and arbitrage relations holding. The authors go further to capture 1x long, −1x inverse as well as 2x leveraged ETNs and the corresponding ETFs, to give a broad representation across the ETP market. The authors establish causal relations between inverse and leveraged products where causal relations are not yet documented.

This chapter focuses on the common occurrence of wholesale electricity prices that fall below the cost of production. This “negative pricing” in effect represents payment to high-volume consumers for taking excess power off the grid, thus relieving overload. Occurrences of negative pricing have been observed since the wholesale electricity markets have been operating, and occur during periods of low demand, while generators are being kept in reserve for rapid engagement when demand increases (it is expensive and time-consuming to shut down generators and then restart them, so they are often kept in “spooling mode”). In such situations power production may temporarily exceed demand, potentially overloading the system. When the federal government began subsidizing the construction of wind generation projects, with regulations in place requiring transmission grids to accept all of the electricity produced by the wind generators, negative pricing became more frequent.

This chapter adopts value at risk (VaR) to analyze the hedge timing issue. Suppose that a producer, at a give time, recognizes the possible need of a futures contract for risk reduction purpose. Should the producer trade in the futures market immediately or should he wait? Conditions are characterized under which delaying the hedge decision is preferred as it produces a smaller VaR. For an efficient futures market, it appears that the producer is better off delaying the hedge decision as long as possible. However, strong backwardation promotes early hedging.