Time and Frequency Domain Representations of Futures Prices as a Stochastic Process

Abstract

Speculative markets have often been characterized as exhibiting random price behavior where prices tend to move in a series of unconnected steps. The hypothesis of random behavior in commodity markets is investigated by three tests of randomness for a total of 167 futures contracts representing a variety of commodities. The autocorrelation function, spectral density function, and integrated period-ogram are estimated for each futures contract. The empirical results indicate that futures price behavior cannot generally be characterized by a simple random walk model, though several commodities appear to yield random behavior.

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