Samuelson Hypothesis and Carry Arbitrage

We examine the relationship between the Samuelson hypothesis and carry arbitrage. The empirical-based Samuelson hypothesis states that futures price volatility will increase with approaching expiration. The existing empirical evidence related to the Samuelson hypothesis is mixed. The theory-based carry arbitrage is not feasible in many futures markets for a variety of reasons, including the inability to short sell the underlying instrument. We identify and explore the important link between the empirical Samuelson hypothesis and the theoretical carry arbitrage. The degree to which carry arbitrage is empirically validated is associated with the degree to which the Samuelson hypothesis is not supported. The empirical evidence here supports this claim as well as identifies which futures markets are consistent with the Samuelson hypothesis and which futures markets are not. Fifty futures markets are examined between June 1, 1993 and March 8, 2012 and empirical support for the link between carry arbitrage and the Samuelson hypothesis is documented. We provide evidence of carry arbitrage activities in some metals, debt, stock indexes, and foreign exchange futures markets. These same futures markets fail to support the Samuelson hypothesis. These results are important as an improved understanding of futures price volatility provides numerous benefits to a host of constituencies