The No-Arbitrage Hypothesis and Inertia in Forward Markets1

It is well known that the no-arbitrage condition in forward markets is obtained as a feature of the equilibrium if the model allows for strategic behavior on the part of the buyers. We experimentally test for the no-arbitrage condition in a forward market by allowing for active buyers. We test whether having active buyers is equivalent to passive buyers plus the no-arbitrage hypothesis under two forms, exogenous or endogenous, of market closure. We also test an additional inertia hypothesis that looks at whether past participation in a spot-market results in quantities being limited in the forward market stage. We find that the no-arbitrage hypothesis does not hold. Prices in the forward market are higher than in the spot. The inertia hypothesis is not supported either. Even though almost competitive levels of output are observed, sellers obtain a third of the total surplus. We confirm earlier experimental results on competition enhancing effects of forward markets