Samuelson Hypothesis and Carry Arbitrage

Abstract

The “Samuelson Hypothesis” holds that volatility of futures prices increases as maturity approaches. Samuelson’s explanation for this effect in a 1965 paper is not widely known, even by authors who tried to test for it empirically. For instance, futures prices in Samuelson’s analysis do not come from the cost-of-carry model. In this article, Brooks conducts a vast empirical exploration of the Samuelson Hypothesis with 50 futures markets over close to 20 years and finds that while some markets do show this effect, those in which the carry arbitrage trade is easy to execute generally do not.

TOPICS: Futures and forward contracts, volatility measures, statistical methods