The relationship between spot and futures prices: An empirical analysis

This study provides an empirical test of this hypothesis using daily changes in LME average copper prices over the 1994-2011 period. It finds that the correlation coefficients between day-to-day changes in spot and futures prices are quite close to 1 during periods of strong contango. During periods of backwardation and weak contango, the correlations are positive but lower. These findings provide empirical support for the hypothesis advanced by Tilton et al. that investor demand on futures markets affects spot and futures prices similarly when the markets are in strong contango but somewhat less so when they are in weak contango or backwardation.