ABSTRACT
Futures prices are rationally formed current prices relating to later delivery dates; they are not forecasts of subsequent spot prices. Yet, if all available information, including economic agents' expectations, is fully taken into account in the price formation process, then both current spot and futures prices may be regarded as market anticipations of subsequent spot prices. This chapter explores the hypothesis that futures prices (and spot) are predictors of subsequent spot prices in this sense. It assesses the predictive performance of futures prices for four non-ferrous metals traded on the London Metal Exchange using a simple linear model, the parameters of which are estimated by ordinary least squares or instrumental variables in the case of serial correlation (because of the presence of a lagged endogenous regressor). The results suggest that the unbiasedness hypothesis should not be rejected for copper, tin or lead, but marginally may be rejected for zinc. The chapter begins with a discussion of the functions of futures markets, including a review of the literature on the forward pricing function.
