Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-02T20:15:25.901Z Has data issue: false hasContentIssue false
  • English
  • Français

Foreign Exchange Forward and Futures Prices: Are They Equal?

Published online by Cambridge University Press:  06 April 2009

Hashem Dezhbakhsh
Get access Rights & Permissions [Opens in a new window]

Abstract

Small sample t-test results are reported in the literature that indicate the difference between futures and forward exchange rates are statistically insignificant. Much research draws on this finding, which is in contrast with theory. The evidence presented here suggests this difference does not follow a normal distribution, so the small sample inferences based on the t-tests may be suspect. As appropriate alternatives, nonparametric distribution-free tests are used to reexamine the difference for two sample periods, one covering the 1970s and the other the 1970s and 1980s. A significant divergence is observed for several currencies as well as for a sample of pooled currencies. The results are stronger for samples covering the 1980s. The economic significance of the forward-futures differentials is examined and theoretical justifications are discussed.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 29 , Issue 1 , March 1994 , pp. 75 - 87
Copyright
Copyright © School of Business Administration, University of Washington 1994

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aiken, H. H., and Staff of Computation Laboratory of Harvard University, Tables of Cumulative Binomial Probability. Cambridge, MA: Harvard Univ. Press (1955).Google Scholar
Bodurtha, J. N., and Courtadon, G. R.. “Tests of an American Option Pricing Model on the Foreign Currency Options Market.” Journal of Financial and Quantitative Analysis, 22 (06 1987), 153–167.CrossRefGoogle Scholar
Capozza, D. R., and Cornell, B.. “Treasury Bill Pricing in the Spots and Futures Markets.” Review of Economics and Statistics, 61 (1979), 513–520.CrossRefGoogle Scholar
Chang, C. W., and Chang, J. S. K.. “Forward and Futures Prices: Evidence from the Foreign Exchange Markets.” Journal of Finance, 45 (1990), 1333–1336.CrossRefGoogle Scholar
Cornell, B., and French, K. R.. “Taxes and the Pricing of Stock Index Futures.” Journal of Finance, 38 (1983), 675–694.Google Scholar
Cornell, B., and Reinganum, M. R.. “Forward and Futures Prices: Evidence from the Foreign Exchange Markets.” Journal of Finance, 36 (1981), 1035–1045.Google Scholar
Cox, J. C.; Ingersoll, J. E.; and Ross, S. A.. “The Relation Between Forward Prices and Futures Prices.” Journal of Financial Economics, 9 (1981), 321–346.CrossRefGoogle Scholar
Doksum, K., and Thompson, R.. “Power Bounds and Asymptotic Minimax Results for One-sample Rank Tests.” Annals of Mathematical Statistics, 42 (1971), 12–34.CrossRefGoogle Scholar
Dyre, A. R. “Comparisons of Tests for Normality with a Cautionary Note.” Biometrika, 61 (1974), 185–189.CrossRefGoogle Scholar
Evans, G. W. “A Test for Speculative Bubbles in the Sterling-Dollar Exchange Rate: 1981–1984.” American Economic Review, 76 (1986), 621–636.Google Scholar
French, K. R. “A Comparison of Futures and Forward Prices.” Journal of Financial Economics, 12 (1983), 311–342.Google Scholar
Friedman, D., and Vandersteel, S.. “Short-Run Fluctuations in Foreign Exchange Rates: Evidence from the Data, 1973–1979.” Journal of International Economics, 13 (1982), 171–186.CrossRefGoogle Scholar
Gupta, M. K. “An Asymptotically Nonparametric Test of Symmetry.” Annals of Mathematical Statistics, 38 (1967), 849–866.CrossRefGoogle Scholar
Hamilton, J. D. “Rational Expectations Econometric Analysis of Changes in Regime: An Investigation of the Term Structure of the Interest Rates.” Journal of Economic Dynamics and Control, 12 (1988), 385–423.CrossRefGoogle Scholar
Hampel, F. R.; Ronchetti, E. M.; Rousseeuw, P. J.; and Stahel, W. A.. Robust Statistics: The Approach Based on Influence Functions. New York, NY: Wiley (1986).Google Scholar
Hettmansperger, T. P.Statistical Inference Based on Ranks, New York, NY: Wiley (1984).Google Scholar
Hodrick, R. J., and Srivastava, S.. “Foreign Currency Futures.” Journal of International Economics, 22 (1987), 1–24.Google Scholar
Hogg, R. V., and Craig, A. T.. Introduction to Mathematical Statistics, 4th ed.New York, NY: Macmillan (1978).Google Scholar
Huber, P. J. “The 1972 Wald Lecture, Robust Statistics: A Review.” Annals of Mathematical Statistics, 43 (1972), 1041–1067.Google Scholar
Jarrow, R. A., and Oldfield, G. S.. “Forward Contracts and Futures Contracts.” Journal of Financial Economics, 9 (1981), 373–382.CrossRefGoogle Scholar
Kane, E. J. “Market Incompleteness and Divergence Between Forward and Futures Interest Rates.” Journal of Finance, 35 (1980), 221–234.Google Scholar
Koenker, R. “Robust Methods in Econometrics.” Econometric Reviews, 1 (1982), 213–255.Google Scholar
Kolb, R. W.; Morin, R. A.; and Gay, G. D.. “Regulation, Regulatory Lag, and the Use of Futures Markets.” Journal of Finance, 38 (1983), 405–418.CrossRefGoogle Scholar
Lehman, E. L.Nonparametrics: Statistical Methods Based on Ranks. Oakland, CA: Holden-Day (1975).Google Scholar
Mandelbrot, B. “The Variation of Some Other Speculative Prices.” Journal of Business, 40 (1967), 393–413.CrossRefGoogle Scholar
Mankiw, N. G.; Miron, J. A.; and Weil, D. N.. “The Adjustment of Expectations to a Change in Regime: A Study of the Founding of the Federal Reserve.” American Economic Review, 77 (1987), 358–374.Google Scholar
McCornack, R. L. “Extended Tables of the Wilcoxon Matched Pair Signed Rank Statistic.” Journal of the American Statistical Association, 60 (1965), 864–871.CrossRefGoogle Scholar
McFarland, J. W.; Pettit, R. R.; and Sung, S. K.. “The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement.” Journal of Finance, 37 (1982), 693–715.CrossRefGoogle Scholar
Meese, R. A. “Testing for Bubbles in Exchange Markets: A Case of Sparkling Rates?” Journal of Political Economy, 94 (1986), 345–373.Google Scholar
Meulbroek, L. “A Comparison of Forward and Futures Prices of an Interest Rate-Sensitive Financial Asset.” Journal of Finance, 41 (1992), 381–396.Google Scholar
Ordnance Corps Pamphlet, Tables of Cumulative Binomial Probabilities, ORDP 20–1, Office of the Chief of Ordnance, Washington, D.C. (09 1952).Google Scholar
Park, H. Y., and Chen, A. H.. “Differences Between Futures and Forward Prices: A Further Investigation of the Marking-to-Market Effects.” Journal of Futures Markets, 5 (1985), 77–88.CrossRefGoogle Scholar
Polakoff, M. A., and Grier, P. C.. “A Comparison of Foreign Exchange Forward and Futures Prices.” Journal of Banking and Finance, 15 (1991), 1057–1080.CrossRefGoogle Scholar
Randles, R. H., and Wolfe, D. A.. Introduction to the Theory of Nonparametric Statistics. New York, NY: Wiley (1979).Google Scholar
Rendelman, R., and Carabini, C.. “The Efficiency of Treasury Bill Futures Market.” Journal of Finance, 39 (1979), 895–914.Google Scholar
Richard, S. F., and Sundaresan, M.. “A Continuous Time Equilibrium Model of Forward Prices and Futures Prices in a Multigood Economy.” Journal of Financial Economics, 9 (1981), 347–372.CrossRefGoogle Scholar
Shapiro, S. S., and Wilk, M. B.. “An Analysis of Variance Test for Normality (Complete Samples).” Biometrika, 52 (1965), 591–611.CrossRefGoogle Scholar
Shapiro, S. S.; Wilk, M. B.; and Chen, H. J.. “A Comparative Study of Various Tests for Normality.” Journal of the American Statistical Association, 63 (1968), 1343–1372.Google Scholar
So, J. C. “The Sub-Gaussian Distribution of Currency Futures: Stable Paretian or Nonstationarity.” Review of Economics and Statistics, 69 (1987), 100–107.CrossRefGoogle Scholar
Wilcoxon, F.; Katti, S. K.; and Wilcox, R. A.. “Critical Values and Probability Levels for the Wilcoxon Rank Sum Test and the Wilcoxon Signed Rank Test.” In Selected Tables in Mathematical Statistics, Vol. I, Harter, H. and Owen, D. B., eds. Chicago, IL: Markham Publishing (1970).Google Scholar