| Abstract: | Many researchers have found that spot and futures prices are not cointegrated in some commodity markets, or they are cointegrated but not with a cointegrating vector (1, ?1). One interpretation is that disturbances to excess returns have a unit root persistence, which implies that spot and futures prices do not move together one-for-one in the long run. To provide an alternative explanation for this finding, this article proposes a regime switching model of spot prices that can be viewed in the same framework as Fama and French (1988). Based on this model, Monte Carlo experiments are performed to show that tests for cointegration and estimates of the cointegrating vector are likely to be biased when a sample contains infrequent changes in regime. Taking these shifts into account, the null hypothesis that spot and futures prices are cointegrated and move together one-for-one in the long run can no longer be rejected. © 1998 John Wiley & Sons, Inc. Jrl Fut Mark 18:871–901, 1998 |
