Backward to the Futures : A Test of Three Futures Markets

Backwardation, first discussed by Keynes (1923), (1930) and Hicks (1946), is a fee paid by a seller of a security to the buyer for the privilege of deferring delivery. It implies that the futures price falls short of the spot price. The reverse case, 'contango', implies that the futures price exceeds the spot price. This paper applies tests for the existence of backwardation to daily closing prices on the Sydney Futures Exchange (SFE), London International Financial Futures Exchange (LIFFE) and the Singapore International Monetary Exchange (SIMEX). We apply a series of tests after Kolb's (1992) US study and find that few of the contracts studied consistently exhibit backwardation