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On Contango, Backwardation, and Seasonality in Index Futures

Mohd Asraf Abd Wahab, Azhar Mohamad and Imtiaz Sifat
The Journal of Private Equity Spring 2019, 22 (2) 69-82; DOI: https://doi.org/10.3905/jpe.2019.1.076
Mohd Asraf Abd Wahab
holds a master of science degree in finance from International Islamic University Malaysia in Kuala Lumpur, Malaysia
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Azhar Mohamad
is an associate professor of finance in the Department of Finance, Kulliyyah of Economics and Management Sciences at the International Islamic University in Kuala Lumpur, Malaysia,
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  • For correspondence: dr@azharmohamad.asia
Imtiaz Sifat
is an independent researcher based in Kuala Lumpur, Malaysia
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Abstract

The authors investigate contango and backwardation formations and seasonality traits in Malaysia over 22 years spanning 1995 to 2017. Employing graphical observations and statistical tests, contango and backwardation traits appear through market expectations, seasonality, cost of carry model predictions, and index volatility. Unit root, cointegration, and Granger causality tests are employed to assess the existence of long-term relationships between KLCI (cash/spot index) and FKLI (stock index futures) contracts and the direction of the causality relationship. The results are suggestive of cointegration between the futures price index and the spot index in Malaysia. Moreover, a long-run relationship exists between the two variables—a result of backwardation’s predictive ability to find cash market bottoms. Malaysian markets show backwardation in April to June and August, while December is consistently in contango and exhibits moderately high success in the use of a cost-of-carry model in predicting contango and backwardation.

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The Journal of Private Equity: 22 (2)
The Journal of Private Equity
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On Contango, Backwardation, and Seasonality in Index Futures
Mohd Asraf Abd Wahab, Azhar Mohamad, Imtiaz Sifat
The Journal of Private Equity Feb 2019, 22 (2) 69-82; DOI: 10.3905/jpe.2019.1.076

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On Contango, Backwardation, and Seasonality in Index Futures
Mohd Asraf Abd Wahab, Azhar Mohamad, Imtiaz Sifat
The Journal of Private Equity Feb 2019, 22 (2) 69-82; DOI: 10.3905/jpe.2019.1.076
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