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n Journal of Contemporary Management - Market efficiency and price discovery : a comment on futures rollover practices
Studies of market efficiency and price discovery use financial time series data, a common example being that of spot and futures prices over a given time period. The spot series is considered 'continuous' and is taken from one specific asset. The futures series is more complicated. This is due to the fact that the futures series represents multiple contracts which are often traded simultaneously.
Empirical research shows clear support for the use of prices on the nearby contract for constructing the futures price series. It is less clear which method for rolling over from one futures contract to the next is preferred. Using the FTSE/JSE Top40 Index and futures contracts, two common rollover approaches are implemented: a rollover one day prior to contract expiry, and a rollover at the end of the month immediately prior to the expiry month.
It is found that results are largely unaffected by the choice of rollover procedure, however, there is evidence that the rollover decision influences the results of the vector error correction model. As a result, caution in choosing a rollover strategy and consideration of the economic and statistical sense of the chosen strategy is recommended when constructing a futures price series.
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