Bryan Caplan  

Bad News for Me?

Producer and Consumer Cities... New NBER working papers...

New York Mercantile Exchange futures prices actually go out 8 years, and show little decline during that period. As my colleague John Nye suggested this morning, though, a flat nominal price for 8 years with 3% inflation implies a 20% fall in the real price. I'll need a bit more to win my bet with Tyler and David Balan, but I'm not too worried.

Note further: The volume for the long-term future contracts is extremely low. That hardly shows that the market price is an overestimate, but it should reduce confidence in its accuracy. Any idea what the transactions costs for short-selling such a thinly-traded item are?

Comments and Sharing

COMMENTS (6 to date)
Matt writes:

With your confidence you can get all the bets you want at the Mercantile Exchange!

However, I agree that we will see $3.25 gas at the bottom of the recession, but it won't last.

Bryan Caplan writes:

My point is that current market prices for oil in 2016 are pretty close to what I need to win my bet. So why would I want to bet against the market, especially considering transactions costs and my inexperience in short-selling?

P.S. Futures markets don't seem to think that oil prices (and gas prices by extension) are going to fall much in the next few years. So there's not much reason to expect the $3.25 price you predict anytime soon.

Bob writes:


Every futures contract has a long and short side, much like every stock trade has a buyer and seller. So for transaction costs you shouldn't think of the analogy as shorting, rather think of it as selling - costs are about the same as buying. Relatively cheap, easy, and with built-in leverage, which is why if you want to speculate in either direction, you like the futures market.

Phil writes:

How much is the bid/ask spread on the contract 8 years out?

karthik writes:

why don't you take a position on the 8 years futures markets NOW and hedge your bet against tyler and david?

Sharper writes:

The basic problem is that even if you think you'll make 30% in 8 years on your futures contract, there are a lot easier and more sure ways of making a lot more than 30% on your money over the course of 8 years.

So that leads to a thin market as people put their money in more lucrative ventures.

In a competition for investment capital, an 8 year futures market would have to give you some pretty serious returns to justify the time period.

Comments for this entry have been closed
Return to top