The forward pricing function of the London metal exchange

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Abstract
Future prices are rationally formed current prices relating to later delivery dates, and 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 paper 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 estimated by both ordinary least squres and instrumental variable estimators. Significant differences are found as between copper, zinc tin and lead. The paper begins with a discussion of the feasibility conditions for futures trading and the functions of futures markets, including a detailed review of the forward pricing function.