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Meaning of Spot Prices Following Equity Forwards

Article Quant Q&A · Author: HHC
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Summary

The document clarifies the phrase “equity returns follow forward” as a claim that the equity spot price moves toward the corresponding forward price over time. It illustrates the idea with a spot value, a zero dividend assumption, and a positive interest rate: the forward value reflects the cost of carrying the asset, and the example’s spot path is said to track that forward level as the horizon shortens.

This is an informal explanation of terminology, not a tested trading rule or a claim that spot prices must converge along a predictable path. The example omits market frictions and uncertainty, and the document supplies no empirical evidence or conditions under which the proposed behavior holds. It is useful as an interpretation of the phrase in context, while leaving the broader economic or statistical meaning dependent on the source in which it appeared.

Key ideas

  • In this context, following forwards means that the equity spot price moves toward the forward price over time.
  • The example assumes zero dividends and a positive interest rate when relating spot and forward levels.
  • The illustration describes an interpretation of terminology rather than an empirically established trading strategy.
  • The document does not discuss market frictions or test whether spot prices reliably track forwards.

Tags

EquitiesStatistics
Full text
# What does "follow forwards" mean?


# What does "follow forwards" mean?












In the context of "if equity returns follow forward", what exactly does "follow forwards" mean?

Thank you!

## Answer by mbison (score 0, accepted)

https://quant.stackexchange.com/a/37523

in this context it probably means that over time equity spot will move towards the forward.

For example: at t0 the spot S(t0) = 100, and assume divs are 0 and rate is 1%. Then the 1y forward would be 100*exp(0.01*1).

If spot would follow the forward, then after 6months the spot would have to be 100*exp(0.01*0.5).

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.