Spot and Futures Markets Linkages: Does Contango Differ from Backwardation?

Recent research has concluded that spot and futures copper returns are more closely correlated during periods of contango than of backwardation. It is argued speculation and investor demand in futures markets should affect spot prices to a much lesser extent during backwardation, due to an infeasible inter-temporal arbitrage. This article expands this line of research by analyzing daily spot and 3-, 15-, and 27-month futures contract prices for industrial metals traded on the London Metal Exchange over a period of more than two decades. Estimates of convenience yields are provided, along with tests for Granger causality between futures and spot returns after accounting for cointegration, and tests for statistical differences between correlations of contemporaneous spot and futures returns during periods of contango and backwardation. After various robustness checks, the evidence supporting a stronger linkage between spot and futures markets in contango is weak.