A model of returns and trading in futures markets

This paper develops an equilibrium model of a competitive futures market in which investors trade to hedge positions and to speculate on their private information. Equilibrium return and trading patterns are examined. (1) In markets where the information asymmetry among investors is small, the retur n volatility of a futures contract decreases with time-to-maturity (i.e., t he Samuelson effect holds). (2) However, in markets where the information a symmetry among investors is large, the Samuelson effect need not hold. (3) Additionally, the model generates rich time-to-maturity patterns in open in terest and spot price volatility that are consistent with empirical finding s.