Commodity Futures Markets Research Articles

Determinants of Hedging and Risk Premia in Commodity Futures Markets

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 reve? nues 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 (de? crease) 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.

An Investigation into the Equilibrium Structure of the Commodity Futures Market Anomaly

AbstractCommodity futures contracts are shown to be characterized by indivisibility problems and tax disadvantages. An empirical test demonstrates that long futures investors were compensated for these drawbacks prior to the mid‐1970s. However, compensation for the investment disadvantages of commodity futures ceased to exist after 1974. The year 1974 is significant because barriers to institutional investment in the futures market were removed in that year.

Efficiency in Commodity Futures Markets

Efficiency in Commodity Futures Markets

Efficiency in Commodity Futures Markets

This paper undertakes an econometric investigation into the efficiency of commodity futures markets. Despite a considerable amount of empirical literature, there is no general consensus on whether or not the markets are efficient. The results of this study suggest that for certain commodities expected excess returns to futures speculation are non-zero, however, it is argued that these results do not necessarily imply that markets are inefficient, or that agents do not act rationally. The implications of the study for the cost of using the futures markets for hedging, and for the power of futures prices to forecast future spot prices, are also noted.

Returns to Individual Traders of Futures: Aggregate Results

By means of a data set previously unavailable for academic research, actual trading histories of individual futures traders are examined. With this more detailed data, the author is able to (1) test the risk/return hypothesis directly; (2) include a much larger segment of the market than before; and (3) use actual instead of hypothetical t rading strategies. It is shown that the commercial (hedging) traders are most profitable, while noncommercial (speculative) traders earn n egative or zero profits. Because speculators are not receiving reward s for the risks they willingly absorb, the theory of normal backwarda tion and its extension can be rejected. Copyright 1987 by University of Chicago Press.

Informational Externalities and Welfare-Reducing Speculation

Introducing more speculators into the market for a given commodity leads to improved risk sharing but can also change the informational content of prices. This inflicts an externality on those traders already in the market, whose ability to make inferences based on current prices will be aff ected. In some cases, the externality is negative: the entry of new s peculators lowers the informativeness of the price to existing trader s. The net result can be one of price destabilization and welfare red uction. This is true even when all agents are rational, risk-averse c ompetitors who make the best possible use of their available informat ion. Copyright 1987 by University of Chicago Press.

Investor Protection in the Commodity and Financial Futures Markets

Investor Protection in the Commodity and Financial Futures Markets

BOOK REVIEWS: How Commodity Futures Markets Work, by Basil S Yamey, Richard L Sandor and Brian Hindley

BOOK REVIEWS: How Commodity Futures Markets Work, by Basil S Yamey, Richard L Sandor and Brian Hindley

The Stock Market and the Commodity Futures Market: Diversification and Arbitrage Potential

Historical relationships between the stock market and the commodity futures market, as proxied by the S&P 500 and the Commodity Futures Index, suggest that the S&P may have slightly outperformed the CFI over the 1978-81 period. In earlier years, however, the CFI clearly outperformed the S&P. Relative performances of the stock and commodities futures markets appear to be sensitive to investment horizon. Regression analysis indicates virtually no relationship between the rates of return of the two series. Risk and return, however, increase with horizon, whereas skewness and kurtosis are generally negatively related to horizon. Investors should be aware of these factors when selecting investment horizons. Investigation of the lead-lag relation between the two series confirms their independence. The S&P led the CFI by one day in 1969 and in 1972, while the two were instantaneously related in 1970. Data for 1973 through 1981 show complete independence, regardless of evaluation technique. These results suggest that commodity futures contracts may be used in conjunction with an equity portfolio to help reduce risks and enhance portfolio returns. Opportunities for profitable arbitrage between the two indexes are not likely, however.

Determination of the Predomincance of Various Expectations Patterns in Commodity Futures and Spot Markets

Division of Agricultural Sciences UNIVERSI1Y OF CALIFORt'JIA Working Paper No. 362 DETERMINATION OF TIIE PREIX)MINAl'JCE OF VARIOUS EXPECTATIONS PATTERNS IN CQ\tvDDITI RJIURES AND SPOT MARKETS by Richard E.' Just and Gordon C. Rausser GIANNINI FOUNDATION 011 AGRICULTURAL ECONOMICS LIBRARY California Agricultural Experiment Station I Giannini Foundation of Agricultural Economics April 1985 .l I

The Effects of Supply and Interest Rate Shocks in Commodity Futures Markets

AbstractThis paper extends previous studies of futures markets to highlight the role of expectations in the analysis of supply and interest rate shocks. Shocks which are expected to be permanent generally will create larger movements in spot and futures prices than shocks which are regarded as transitory. Further, the reactions of spot and futures prices may differ both qualitatively and quantitatively depending on whether new information refers to events in the current period or to likely developments in some future period. The results demonstrate the potential importance of capturing expectations effects in empirical studies of futures market behavior.

Oil-Futures Markets

The book is divided into four parts: I. Commodity Futures Markets; II. International Petroleum; Traders and Markets; III. Oil Futures Markets; IV. International Issues; with 16 chapters and 10 appendices covering prices and specimen futures contracts. It is an introduction to the ways of the world petroleum industry and the ins and outs of the commodities trading systems. It is designed to introduce the theory and practice of oil future to a wide audience. The chapters are detailed descriptions of the institutions, the processes and the consequences of futures trading with historical descriptions of the emergence of the activity and the strategy behind it. There are chapters on multinational oil firms and on the formation of OPEC, and a chapter on why are there Futures Markets. In addition, there are chapters on each of the principal exchanges, government stockpiling and the international energy agency.

Commodity Futures Markets and the Law of One Price, by Arvind K. Jain, Michigan International Business Studies, No. 16, Division of Research, Graduate School of Business Administration, University of Michigan, Ann Arbor, 1980

Journal of Futures MarketsVolume 1, Issue 3 p. 413-414 Book Review Commodity Futures Markets and the Law of One Price, by Arvind K. Jain, Michigan International Business Studies, No. 16, Division of Research, Graduate School of Business Administration, University of Michigan, Ann Arbor, 1980 P. J. Kaufman, P. J. Kaufman Kaufman Commodities Research and Management Inc. Chatham, New JerseySearch for more papers by this author P. J. Kaufman, P. J. Kaufman Kaufman Commodities Research and Management Inc. Chatham, New JerseySearch for more papers by this author First published: Autumn (Fall) 1981 https://doi.org/10.1002/fut.3990010314AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat No abstract is available for this article. Volume1, Issue3Autumn (Fall) 1981Pages 413-414 RelatedInformation

Temporal Price Behavior in Commodity Futures Markets

Temporal Price Behavior in Commodity Futures Markets

Temporal Relationships Among Prices on Commodity Futures Markets: Their Allocative and Stabilizing Roles

AbstractThe role that futures markets play in guiding inventories, through hedging, has been emphasized in economic literature. Historically, futures markets first emerged for the annual crops that could be continuously stored (grain and cotton); hence inventory hedging has been important from the outset. But forward pricing which was not attendant upon inventories has long been practiced, and the more recent emergence of futures markets for non‐inventory commodities dramatizes this fact. We show here that the model of intertemporal price relationships differs for the two cases and provide evidence for selected commodities. The contrasting implications for allocation and stabilization are also drawn.

A PORTFOLIO ANALYSIS OF STRADDLE OPERATIONS IN THE FUTURES MARKETS: AN APPLICATION OF THE EXPECTED RETURNS-VARIANCE OF RETURNS HYPOTHESIS*

STRADDLE OPERATIONS are those in which participants simultaneously take both short and long positions in the same market. While operations of this nature frequently occur in the commodity-futures markets, little attention has been devoted to providing a rationale for this form of speculative activity. The purpose of this study is to establish a theoretical rationalization for the observed behavior of speculators in the commodity-futures market with particular reference to the phenomenon of straddle operations. Attempts to provide a systematic account of the basic theory of commodity-futures trading have often assumed the condition of certainty. As any theory of futures trading is intimately bound up with uncertainty, any meaningful theory of this activity must take it into account. The methodological approach taken in the present study is closely related to that developed in the literature surrounding the expected returns-variance of returns hypothesis of investment behavior. Certain characteristics of the commodityfutures market make it particularly suited to such an analysis, leading to some theoretical extensions of this hypothesis. The basic model of asset choice under uncertainty is expanded by recognizing the existence of borrowing, short sales, straddle transactions, and the holding of assets with negative expected rates of return. The suggested procedure for determining the investor's optimal position in the commodity-futures market is both a maxim for investment behavior and a hypothesis consistent with observed behavior. Futures traders may not consciously operate according to these procedures, but they act as if they do. In addition to rationalizing the existence of straddle operations, this work includes an analysis of the apparent differences in the actions of small and large commodityfutures speculators when they are viewed as two distinct groups. The study also includes a rigorous differentiation of hedging and speculation which clears up some confusion in the literature regarding the nature and purposes of a hedge. The idea that a speculative element exists in many hedging operations arises, in part, from the fact that many such operations do not consist of equal offsetting positions in the spot and futures markets. This model shows that generally a hedger would minimize, but not eliminate, risk by taking unequal positions in the two markets. Thus no speculative motive can be imputed to the hedger who fails to match his position in the spot market with an equal but offsetting position in the futures market. The model of speculative activity developed here establishes conditions leading to the rational holding of a particular future with a negative expected rate of return. Such action on the part of the investor is rational when the holding of the particular future on which he expects to suffer a loss sufficiently reduces the risk associated with

“Straddling” between Commodity Futures Markets

The Manchester SchoolVolume 21, Issue 1 p. 22-38 “Straddling” between Commodity Futures Markets J. S. McClay, J. S. McClaySearch for more papers by this author J. S. McClay, J. S. McClaySearch for more papers by this author First published: January 1953 https://doi.org/10.1111/j.1467-9957.1953.tb01481.xAboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinked InRedditWechat Volume21, Issue1January 1953Pages 22-38 RelatedInformation