Sources of Systematic Risk in Futures and Spot Markets: A Study of Market Integration

This article explains the implications of asset market integration for the decision making process of market participants and tests the integration between futures and spot markets. Integration is investigated with respect to the hypothesis that the sources of systematic risk in futures and spot markets command identical risk premia. While the futures and the spot markets for currencies and equities are integrated, we present new evidence that the futures and commodity spot markets are segmented. Such results are of primary importance to investors who use asset pricing models to adjust the risk-return trade-off of their portfolio and evaluate portfolio performance. Copyright Blackwell Publishers Ltd 2000.