Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-05T09:12:35.008Z Has data issue: false hasContentIssue false
  • English
  • Français

Determinants of Hedging and Risk Premia in Commodity Futures Markets

Published online by Cambridge University Press:  06 April 2009

David Hirshleifer
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper examines the determinants of commodity futures hedging and of risk premia arising from covariation of the futures price with stock market returns, and with the revenues of producers. Owing to supply shocks that stochastically redistribute real wealth (surplus) between producers and consumers, and to limited participation in the futures market, the total risk premium in the model is not proportional to the contract's covariance with aggregate consumption. Stock market variability interacts with the incentive to hedge, causing the producer hedging component of the risk premium to increase (decrease) with income elasticity, for a normal (inferior) good. Production costs that depend on output raise the premium. We argue that output and demand shocks will typically be positively correlated, raising the premium. High supply elasticity reduces the absolute heding premium by reducing the variability of spot price and revenue.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 24 , Issue 3 , September 1989 , pp. 313 - 331
Copyright
Copyright © School of Business Administration, University of Washington 1989

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Anderson, R., and Danthine, J. P.. “Hedger Diversity in Futures Markets.” The Economic Journal, 93 (06 1983), 370–389.CrossRefGoogle Scholar
Bodie, Z., and Rosansky, V. I.. “Risk and Return in Commodity Futures.” Financial Analysts Journal, 36 (05–06 1980), 27–39.CrossRefGoogle Scholar
Breeden, D. T. “An Intertemporal Asset Pricing Model with Stochastic Consumption and Investment Opportunities.” Journal of Financial Economics, 7 (09 1979), 265–296.CrossRefGoogle Scholar
Breeden, D. T. “Consumption Risk in Futures Markets.” Journal of Finance, 35 (05 1980), 503–520.CrossRefGoogle Scholar
Britto, R. “The Simultaneous Determination of Spot and Futures Prices in a Simple Model with Production Risk.” Quarterly Journal of Economics, 99 (05 1984), 351–365.CrossRefGoogle Scholar
Carter, C.; Rausser, G.; and Schmitz, A.. “Efficient Asset Portfolios and the Theory of Normal Backwardation.” Journal of Political Economy, 91 (04 1983), 319–331.CrossRefGoogle Scholar
Chang, E. “Returns to Speculators and the Theory of Normal Backwardation.” Journal of Finance, 40 (03 1985), 193–208.CrossRefGoogle Scholar
Cootner, P. H. “Returns to Speculators: Telser versus Keynes.” Journal of Political Economy, 68 (08 1960), 396–404.CrossRefGoogle Scholar
Cox, J.; Ingersoll, J.; and Ross, S.. “The Relation between Forward Prices and Futures Prices.” Journal of Financial Economics, 9 (12 1981), 321–346.CrossRefGoogle Scholar
Diamond, D. W., and Verrechia, R. E.. “Optimal Managerial Contracts and Equilibrium Security Prices.” Journal of Finance, 37 (05 1982), 275–287.CrossRefGoogle Scholar
Dusak, C. “Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums.” Journal of Political Economy, 23 (11–12 1973), 1387–1406.CrossRefGoogle Scholar
Grauer, F. L. A., and Litzenberger, R. H.. “The Pricing of Commodity Futures Contracts Nominal Bond and Other Risky Assets under Commodity Price Uncertainty.” Journal of Finance, 34 (03 1979), 69–83.CrossRefGoogle Scholar
Gray, R. W. “The Characteristic Bias in Some Thin Futures Markets.” Food Research Institute Studies, 2 (1961), 296–312.Google Scholar
Hardy, G. H.; Littlewood, J. E.; and Polya, G.. Inequalities, second ed.Cambridge, MA: Cambridge University Press (1952).Google Scholar
Hirshleifer, D. “Residual Risk, Trading Costs, and Commodity Futures Risk Premia.” Review of Financial Studies, 1 (Summer 1988a), 173–193.CrossRefGoogle Scholar
Hirshleifer, D. “Risk, Futures Pricing, and the Organization of Production in Commodity Markets.” Journal of Political Economy, 96 (12 1988b), 1206–1220.CrossRefGoogle Scholar
Hirshleifer, D. “Hedging Pressure and Futures Price Movements in a General Equilibrium Model.” Econometrica 1 (Winter 1988), 357–376.Google Scholar
Hirshleifer, J. “The Theory of Speculation under Alternative Regimes of Markets.” Journal of Finance, 32 (09 1977), 975–999.CrossRefGoogle Scholar
Kamara, A. “Market Trading Structures and Asset Pricing: Evidence from the Treasury Bill Markets.” Review of Financial Studies, 1 (Winter 1988), 357–376.CrossRefGoogle Scholar
Kawai, M. “Spot and Futures Prices of Nonstorable Commodities under Rational Expectations.” Quarterly Journal of Economics, 98 (05 1983), 235–254.CrossRefGoogle Scholar
Marcus, A. “Efficient Asset Portfolios and the Theory of Normal Backwardation: A Comment.” Journal of Political Economy, 92 (1984), 162–164.CrossRefGoogle Scholar
Mayers, D. “Non-Marketable Assets and Capital Market Equilibrium under Uncertainty.” In Studies in the Theory of Capital Markets, Jensen, M., ed. New York: Praeger (1972).Google Scholar
Newbery, D. M. G., and Stiglitz, J. E.. The Theory of Commodity Price Stabilization: A Study in the Economics of Risk. Oxford: Clarendon (1981).Google Scholar
Newbery, D. M. G. “On the Accuracy of the Mean-Variance Approximation for Futures Markets.” Working Paper, Univ. of California, Berkeley (1987).Google Scholar
Richard, S., and Sundaresan, S.. “A Continuous Time Equilibrium Model of Forward Prices and Futures Prices in a Multigood Economy.” Journal of Financial Economics, 9 (12 1981), 347–371.CrossRefGoogle Scholar
Stiglitz, J. E. “Futures Markets and Risk: A General Equilìbrium Approach.” In Futures Markets, Streit, M., ed. London: Basil Blackwell (1983).Google Scholar
Stoll, H. R. “Commodity Futures and Spot Price Determination and Hedging in Capital Market Equilibrium.” Journal of Financial and Quantitative Analysis, 14 (11 1979), 873–894.CrossRefGoogle Scholar
Turnovsky, S. J. “The Determination of Spot and Futures Prices with Storable Commodities.” Econometrica, 51 (09 1983), 1363–1387.CrossRefGoogle Scholar