Advertisement

Hedging pressure and speculation in commodity markets

  • Ivar Ekeland
  • Delphine Lautier
  • Bertrand Villeneuve
Research Article
  • 94 Downloads

Abstract

We propose a micro-founded equilibrium model to examine the interactions between the physical and the derivative markets of a commodity. This model provides a unifying framework for the hedging pressure and storage theories. The model shows a variety of behaviors at equilibrium that can be used to analyze price relations for any commodity. Further, through a comparative statics analysis, we precisely identify the losers and winners in the financialization of the commodity markets. Therefore, this paper clarifies the political economy of regulatory issues, like speculators’ influence on prices.

Keywords

Equilibrium model Commodity Speculation Regulation Futures markets 

JEL Classification

D4 G13 Q02 

Notes

Acknowledgements

The authors acknowledge conversations with Steven Baker, Bruno Biais, Eugenio Bobenrieth, Alexander Guembel, Roger Guesnerie, Jeffrey Harris, Ulrich Horst, Alejandro Jofre, Larry Karp, Sophie Moinas, Marion Oury, Andreas Rathgeber, Michel Robe, Jean-Charles Rochet, and Brian Wright; remarks from René Carmona, Gabrielle Demange, and Sven Rady; and comments from audiences in Paris (FIME Research Initiative, Chair Finance and Sustainable Development, ACPR, CEMAP, ENSTA and Mines ParisTech), ETH Zurich, Montreal (IAES), Toulouse School of Economics, Santiago de Chile (CMM), Los Angeles (IPAM at UCLA), Lyon (AFFI and ISFA), Bonn (Haussdorf Center for Mathematics), Toronto (Fields Institute), Milan (Bocconi University), Cachan (École Normale Supérieure), Florence (Summer school on commodities) and Washington D.C. (American University). This article is based on work supported by the Chair Finance and Sustainable Development, the FIME Research Initiative and the MIMO Research Initiative, all at the Foundation “Europlace Institute of Finance.”

References

  1. Acharya, V.V., Lochstoer, L.A., Ramadorai, T.: Limits to arbitrage and hedging: evidence from commodity markets. J. Financ. Econ. 109(2), 441–465 (2013).  https://doi.org/10.1016/j.jfineco.2013.03.003 CrossRefGoogle Scholar
  2. Anderson, R.W., Danthine, J.P.: Hedger diversity in futures markets. Econ. J. 93(370), 370–389 (1983)CrossRefGoogle Scholar
  3. Baker, SD.: The Financialization of Storable Commodities. Working Paper, University of Virginia (2016)Google Scholar
  4. Baker, SD., Routledge, BR.: The Price of Oil Risk (2016)Google Scholar
  5. Basak, S., Pavlova, A.: A model of financialization of commodities. J. Finance 71(4), 1511–1556 (2016)CrossRefGoogle Scholar
  6. Bessembinder, H., Lemmon, M.L.: Equilibrium pricing and optimal hedging in electricity forward markets. J. Finance 57(3), 1347–1382 (2002).  https://doi.org/10.1111/1540-6261.00463 CrossRefGoogle Scholar
  7. Bhardwaj, G., Gorton, GB., Rouwenhorst, KG.: Facts and Fantasies about Commodity Futures Ten Years Later. Working Paper, NBER 21243 (2015)Google Scholar
  8. Boons, M., De Roon, FA., Szymanowska, M.: The Price of Commodity Risk in Stock and Futures Markets. Working Paper, SSRN 1785728 (2014)Google Scholar
  9. Brennan, M.J.: The supply of storage. Am. Econ. Rev. 48(1), 50–72 (1958)Google Scholar
  10. Brunetti, C., Reiffen, D.: Commodity index trading and hedging costs. J. Financ. Mark. 21, 153–180 (2014).  https://doi.org/10.1016/j.finmar.2014.08.001 CrossRefGoogle Scholar
  11. Brunetti, C., Büyüşahin, B., Harris, J.H.: Speculators, prices, and market volatility. J. Financ. Mark. Quant. Anal. 51(5), 1545–1574 (2016).  https://doi.org/10.1017/S0022109016000569 CrossRefGoogle Scholar
  12. Chambers, M.J., Bailey, R.E.: A theory of commodity price fluctuations. J. Polit. Econ. 104(5), 924–957 (1996)CrossRefGoogle Scholar
  13. Cheng, I.H., Xiong, W.: Financialization of commodity markets. Annu. Rev. Financ. Econ. 6(1), 419–441 (2014).  https://doi.org/10.1146/annurev-financial-110613-034432 CrossRefGoogle Scholar
  14. Danthine, J.P.: Futures markets and stabilizing speculation. J. Econ. Theory 17(1), 79–98 (1978).  https://doi.org/10.1016/0022-0531(78)90124-2 CrossRefGoogle Scholar
  15. De Roon, F.A., Nijman, T.E., Veld, C.: Hedging pressure effects in futures markets. J. Finance 55(3), 1437–1456 (2000).  https://doi.org/10.1111/0022-1082.00253 CrossRefGoogle Scholar
  16. Deaton, A., Laroque, G.: On the behaviour of commodity prices. Rev. Econ. Stud. 59(1), 1–23 (1992).  https://doi.org/10.2307/2297923 CrossRefGoogle Scholar
  17. Fama, E.F., French, K.R.: Commodity futures prices: some evidence on forecast power, premiums and the theory of storage. J. Bus. 60(1), 55–73 (1987).  https://doi.org/10.2307/2352947 CrossRefGoogle Scholar
  18. FAO, IFAD, IMF, UNCTAD, WFP, the World Bank, the WTO, IFPRI, the UN HLTF: Price Volatility in Food and Agricultural Markets: Policy Responses. Tech. rep., G20 (2011)Google Scholar
  19. Goldstein, I., Yang, L.: Commodity Financialization: Risk Sharing and Price Discovery in Commodity Futures Markets. Working Paper, SSRN 2555996 (2016)Google Scholar
  20. Gorton, G.B., Hayashi, F., Rouwenhorst, K.G.: The fundamentals of commodity futures returns. Rev. Finance 17(1), 35–105 (2013).  https://doi.org/10.1093/rof/rfs019 CrossRefGoogle Scholar
  21. Gregoir, S., Salanié, B.: Spéculation, prix et bien-être. Annales d’économie et de statistique 24, 209–246 (1991)CrossRefGoogle Scholar
  22. Guesnerie, R., Rochet, J.C.: (De)stabilizing speculation on futures markets: an alternative view point. Eur. Econ. Rev. 37(5), 1043–1063 (1993).  https://doi.org/10.1016/0014-2921(93)90108-M CrossRefGoogle Scholar
  23. Hamilton, J.D., Wu, J.C.: Risk premia in crude oil futures prices. Int. J. Money Finance 42, 9–37 (2014).  https://doi.org/10.1016/j.jimonfin.2013.08.003 CrossRefGoogle Scholar
  24. Hamilton, J.D., Wu, J.C.: Effects of index-fund investing on commodity futures prices. Int. Econ. Rev. 56(1), 187–205 (2015).  https://doi.org/10.1111/iere.12099 CrossRefGoogle Scholar
  25. Hart, O., Kreps, D.: Price destabilizing speculation. J. Polit. Econ. 94(5), 927–952 (1986)CrossRefGoogle Scholar
  26. Hirshleifer, D.A.: Risk, Futures pricing and the organization of production in commodity markets. J. Polit. Econ. 96(6), 1206–1220 (1988)CrossRefGoogle Scholar
  27. Hirshleifer, D.A.: Futures, trading, storage and the division of risk: a multiperiod analysis. Econ. J. 99(397), 700–719 (1989)CrossRefGoogle Scholar
  28. Kaldor, N.: Speculation and economic stability. Rev. Econ. Stud. 1(7), 1–27 (1939)CrossRefGoogle Scholar
  29. Kaldor, N.: A note on the theory of the forward market. Rev. Econ. Stud. 7(3), 196–201 (1940)CrossRefGoogle Scholar
  30. Kang, W., Rouwenhorst, KG., Tang, K.: A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets. Working Paper, SSRN 2449315 (2017)Google Scholar
  31. Kat, H.M., Oomen, R.C.A.: What every investor should know about commodities. Part I. J. Invest. Manag. 5(1), 4–28 (2007).  https://doi.org/10.2469/dig.v37.n3.4774 Google Scholar
  32. Keynes, J.M.: A Treatise on Money, vol. 2. Macmillan, New York (1930)Google Scholar
  33. Leclercq, E., Praz, R.: Equilibrium Commodity Trading. Working Paper, SSRN 2464400 (2014)Google Scholar
  34. Newbery, D.M.: When do futures destabilize spot prices? Int. Econ. Rev. 28(2), 291–297 (1987)CrossRefGoogle Scholar
  35. Newbery, D.M.: Futures markets, hedging and speculation. In: Durlauf, S.N., Blume, L.E. (eds.) New Palgrave Dictionary of Economics. Palgrave Macmillan, London (2008)Google Scholar
  36. Routledge, B.R., Seppi, D.J., Spatt, C.S.: Equilibrium forward curves for commodities. J. Finance 55(3), 1297–1338 (2000).  https://doi.org/10.1111/0022-1082.00248 CrossRefGoogle Scholar
  37. Sockin, M., Xiong, W.: Informational frictions and commodity markets. J. Finance 70(5), 2063–2098 (2015).  https://doi.org/10.1111/jofi.12261 CrossRefGoogle Scholar
  38. Szymanowska, M., De Roon, F.A., Nijman, T.E., Van Den Goorbergh, R.: An anatomy of commodity futures risk premia. J. Finance 69(1), 453–482 (2014).  https://doi.org/10.1111/jofi.12096 CrossRefGoogle Scholar
  39. Vives, X.: Information and Learning in Markets: The Impact of Market Microstructure. Princeton University Press, Princeton (2008)Google Scholar
  40. Working, H.: The theory of the price of storage. Am. Econ. Rev. 39(6), 1254–1262 (1949)Google Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Université Paris-Dauphine, PSL Research UniversityParisFrance

Personalised recommendations