Samuelson Effect, The Inverse Of The Chinese Non-ferrous Metals Futures Market

The price volatility of futures should increase as maturity comes near and long-term contract should be more volatile than short-term contract in price movement. Although the price volatility of short-term contract is huge and unstable, in long term, futures price is relatively stable, and this phenomenon is called Samuelson Effect. It is based on the prospect that though commodity price volatility will get stronger due to short-term imbalance of supply and demand, in long term, this imbalance will gradually tend to disappear. Simply put, it can be explained with available information. In other words, information available to traders that can have an impact on long-term futures contract price is relatively less than that on short-term contract. With maturity getting near, information that affects the commodity price will gradually increase, which leads to frequent movement of futures price.Controversy exists for the applicability of Samuelson Effect. However, it is generally believed that Samuelson Effect is more applicable to commodity futures, especially for agricultural commodity futures. Given existing research achievement, most study on Samuelson Effect has been made by foreign researchers and relative empirical analysis is mostly based on mature futures markets of developed countries such as America and Europe. It is quite rare to find research on Samuelson Effect based on China's futures market. We still need to explore whether Samuelson Effect is applicable in china and the reasons if it is not applicable as well as light it should shed on the development of China's futures market.This article will study copper, aluminum and zinc which are traded on Shanghai Futures Exchange with variance analysis and regression analysis to examine the applicability of Samuelson Effect on China's nonferrous metal futures market. Within a framework of prospect theory combined with random walk theory and mean reversion theory, we explain the anti Samuelson Effect in China's nonferrous metal futures market and make proper advice for the performance of the market along with investment activities.