Determinants of Hedging and Risk Premia in Commodity Futures Markets PDF Download
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Author: David A. Hirshleifer
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
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 hedging premium by reducing the variability of spot price and revenue.
Author: David A. Hirshleifer
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
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 hedging premium by reducing the variability of spot price and revenue.
Author: Michaël Dewally
Publisher:
ISBN:
Category :
Languages : en
Pages : 56
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Book Description
Using proprietary energy futures position data, we provide evidence that mean hedger profits are negative while speculator (especially hedge fund) profits are positive; that speculators and hedgers who hold long (short) positions when likely hedgers in aggregate are net short (long) have higher profits than traders whose net positions align with likely hedgers; and that profits on long positions vary inversely with inventories and directly with price volatility. These findings are consistent with the risk premium, hedging pressure, and modern theory of storage hypotheses, respectively. Further, our findings suggest that commodity futures momentum may be due largely to hedging pressure.
Author: Mr.Manmohan S. Kumar
Publisher: International Monetary Fund
ISBN: 145194196X
Category : Business & Economics
Languages : en
Pages : 32
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Book Description
This paper undertakes an econometric investigation into the presence of risk premium in commodity futures markets. The statistical tests are derived from a formal model of asset pricing and are applied to futures prices in a variety of commodity markets. The results suggest that for several commodities there is evidence of a time varying risk premium, particularly in futures contracts maturing six months ahead. The implications of the study for the efficiency of the futures markets and the costs of using these markets for hedging are also noted.
Author: G. S. Maddala
Publisher:
ISBN:
Category : Futures market
Languages : en
Pages : 52
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Book Description
Author: Su Dai
Publisher: GRIN Verlag
ISBN: 3656539219
Category : Business & Economics
Languages : en
Pages : 80
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Book Description
Master's Thesis from the year 2013 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,7, University of Mannheim, language: English, abstract: The commodity futures contract is an agreement to deliver a specific amount of commodity at a future time . There are usually choices of deliverable grades, delivery locations and delivery dates. Hedging belongs to one of the fundamental functions of futures market. Futures can be used to help producers and buyers protect themselves from price risk arising from many factors. For instance, in crude oil commodities, price risk occurs due to disrupted oil supply as a consequence of political issues, increasing of demand in emerging markets, turnaround in energy policy from the fossil fuel to the solar and efficient energy, etc. By hedging with futures, producers and users can set the prices they will receive or pay within a fixed range. A hedger takes a short position if he/she sells futures contracts while owning the underlying commodity to be delivered; a long position if he/she purchases futures contracts. The commonly known basis is defined as the difference between the futures and spot prices, which is mostly time-varying and mean-reverting. Due to such basis risk, a naïve hedging (equal and opposite) is unlikely to be effective. With the popularity of commodity futures, how to determine and implement the optimal hedging strategy has become an important issue in the field of risk management. Hedging strategies have been intensively studied since the 1960s. One of the most popular approaches to hedging is to quantify risk as variance, known as minimum-variance (MV) hedging. This hedging strategy is based on Markowitz portfolio theory, resting on the result that “a weighted portfolio of two assets will have a variance lower than the weighted average variance of the two individual assets, as long as the two assets are not perfectly and positively correlated.” MV strategy is quite well accepted, however, it ignores the expected return of the hedged portfolio and the risk preference of investors. Other hedging models with different objective functions have been studied intensively in hedging literature. Due to the conceptual simplicity, the value at risk (VaR) and conditional value at risk (C)VaR have been adopted as the hedging risk objective function. [...]
Author: Devraj Basu
Publisher:
ISBN:
Category :
Languages : en
Pages : 37
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Book Description
We construct long-short factor mimicking portfolios that capture the hedging pressure risk premium of commodity futures. We consider single sorts based on the open interests of either hedgers or speculators, as well as double sorts based on both positions. The long-short hedging pressure portfolios are priced cross-sectionally and offer Sharpe ratios that systematically exceed those of long-only benchmarks. Further tests show that the hedging pressure risk premiums rise with the volatility of commodity futures markets and that the predictive power of hedging pressure over cross-sectional commodity futures returns is different from the previously documented forecasting power of past returns and the slope of the term structure.
Author: Marta Szymanowska
Publisher:
ISBN:
Category :
Languages : en
Pages : 73
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Book Description
We identify two types of risk premia in commodity futures returns: spot premia related to the risk in the underlying commodity, and term premia related to changes in the basis. Sorting on forecasting variables such as the futures basis, return momentum, volatility, inflation, hedging pressure, and liquidity, results in sizable spot premia in the high-minus-low sorted portfolios between 5% and 14% per annum and term premia between 1% and 3% per annum. We show that a single factor, the high-minus-low portfolio from basis sorts, explains the cross-section of spot premia. Two additional basis factors are needed to explain the term premia.
Author: Stacie Ellen Beck
Publisher:
ISBN:
Category :
Languages : en
Pages : 388
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Book Description
Author: Graciela Kaminsky
Publisher:
ISBN:
Category :
Languages : en
Pages : 32
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Book Description
This paper undertakes an econometric investigation into the presence of risk premium in commodity futures markets. The statistical tests are derived from a formal model of asset pricing and are applied to futures prices in a variety of commodity markets. The results suggest that for several commodities there is evidence of a time varying risk premium, particularly in futures contracts maturing six months ahead. The implications of the study for the efficiency of the futures markets and the costs of using these markets for hedging are also noted.
Author: Christopher A. Bobin
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 276
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Book Description
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