Normal backwardation on the Sydney Futures Exchange: How normal is the SFE?

The concept of 'normal backwardation' originated in the work of Keynes (1923, pp.255-66; 1930, ch.29) and Hicks (1946,pp.130-140). Backwardation is a fee paid by a seller of a security to the buyer for the privilege of deferring delivery. It implies that the futures price falls short of the spot price. The reverse case, 'contango', implies that the futures price exceeds the spot price. This paper applies tests for the existence of backwardation on the Sydney Futures Exchange (SFE) to daily closing prices obtained directly from the SFE on its home page on the WWW. We apply a series of tests after Kolb's (1992) US study. Unlike Kolb, we find that four of the five contracts studied consistently exhibit backwardation. However, these four contracts are all financial futures, namely the Australian All Ordinaries Index (SPI), 90 day T.Bills, 3 year Bonds and ten year Bonds. The one commodity contract examined, the Greasy Wool contract did not exhibit normal backwardation but had a much smaller data set. Thus, we conclude that backwardation is "normal" for the SFE.