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Financial frictions and the futures pricing puzzle.

Gwilym, R. and Ebrahim, M.S. and El Alaoui, A.O. and Rahman, H. and Taamouti, A. (2019) 'Financial frictions and the futures pricing puzzle.', Economic modelling. .


In perfect capital markets, the futures price of an asset should be an unbiased forecast of its realized spot price when the contract matures. In reality, futures prices are often higher for some assets and lower for others. However, there is no stability in the relationship between futures prices and the realized spot prices. This instability has been a puzzle in the existing financial literature. The key to this puzzle may lie in the nature of the model and the lack of market imperfections. In this study, we take a theoretical approach in a dynamic multi-period environment. We incorporate competition between disparate economic agents and impose financial frictions (i.e., imperfections) that are in the form of hedging and borrowing limits on them. Our model gives rise to multiple equilibria, each with unique market clearing prices, with the market switching between these equilibria. Our analysis incorporates a comprehensive consideration of the risks faced by the futures markets participants (i.e., speculators and hedgers) and leads to a better understanding of the puzzle. JEL Classification

Item Type:Article
Full text:Publisher-imposed embargo until 22 August 2020.
(AM) Accepted Manuscript
First Live Deposit - 19 August 2019
File format - PDF
Publisher Web site:
Publisher statement:© <year> This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Record Created:19 Aug 2019 11:28
Last Modified:18 Sep 2019 11:13

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