The Role of Futures in Daily Forward Pricing

Previous research has explored whether a commodity's own-futures price could be used to improve the prediction of its delivery-date spot prices. An additional perspective is whether prices from various futures contracts (both own as well as other commodity and financial) could be used to improve predictions of day-to-day spot prices. Time series models (which could have been implemented by cash-market participants over the observation period) were used to make one- to ten-step-ahead post-sample forecasts of daily spot prices for Texas-Oklahoma slaughter cattle. A model relying on both cash and nearby own-futures price information was shown to significantly improve predictions of daily spot prices over those predictions made by a model relying on a nonfutures (cash) information set.