Essays concerning the impact of measurement costs upon commodity futures markets

Commodity figures contracts are designed to minimise their costs of transfer. McManus and Acheson (1979, 1983) and Telser (1981, 1986) argue that this confines futures to adopting only impersonal and objective specifications of contractual performance. Futures contract specifications are, therefore incomplete when traders in the cash market to which the contract pertains adopt idiosyncratic measures of contractual enforcement. This incompleteness implies a range of indeterminacy in the futures price within which price changes cannot be constrained by arbitrage in the delivery market for contract goods. This creates an opportunity for manipulation of the futures price by traders with lower cost access to the market. Such a possibility could restrict potential order flow and may lead to the market's demise. This hypothesis, relating market failure and contractual incompleteness is designated the measurement cost hypothesis.;Chapter III investigates the consequences of contractual incompleteness for the theory of intertemporal price relationships for storable commodities. Testable propositions concerning the relative price variability of open and spread contract portfolios' are developed, and related to the initial speculative margin requirements established by commodity exchanges. Tests of the measurement coast hypothesis using exchange data on margin requirements for one hundred and eleven commodities are conducted, and support for the hypothesis is evidenced.;Chapter IV analyses the behaviour of the price volatility of futures spread positions as the spread's constituent contracts approach maturity. The measurement cost model's predictions are compared with existing alternatives, and tests conducted to distinguish competing theories. Results are inconclusive, appearing sensitive to specification, specifically the measure of price volatility adopted.;This thesis identifies dimensions in which the measurement cost hypothesis can be adapted to make it amenable to empirical corroboration. Chapter II argues incompletely specified futures contracts may be opportunistically exploited in their delivery period by the delivery of contract goods. Exchange regulatory constraints on redelivery are interpreted as attempts to mitigate the effects of such informed trader opportunism. Their presence is interpreted as evidence of an inherent exploitable contractual weakness. The prediction that regulations governing redelivery will be more restrictive in failed than in active markets is tested using qualitative response models, and results obtained consistent with the hypothesis.