How do futures prices behave? The evidence indicates that they are typically a biased predictor of spot prices at maturity. However, the typical contention that this bias reflects the existence of a seasonal risk premium is not strongly supported by observations. Although futures markets are used by risk-averse producers seeking the insurance offered by risk-bearing speculators, hedgers have been able to buy their insurance relatively cheaply, in many cases even profiting from their futures trading. Speculators’ earnings seem to depend on their forecasting skills, not on the mere existence of a risk premium. Other evidence suggests that the existence of a bias in a particular market owes more to the unique characteristics of the underlying commodity than to the market’s structural characteristics.

Tests of the random character of futures prices have found some degree of serial dependence, but it is not clear whether these dependencies can be profitably exploited. Studies of the volatility of futures price indicate that volatility changes over the life of a contract. The changes appear to depend upon distributions of the underlying state variables and the time to maturity, with the seasonal state variable effect being dominant, so that volatility may rise or fall over the contract’s life.

Multiperiod equilibrium pricing models of futures and forward contracts show that the futures and forward prices usually differ because of marking to market in the futures market. Unlike forward trading, futures trading represents speculation on both the instantaneous interest rates and the spot prices. Consequently, futures prices depend on the comovement of spot prices and interest rates.