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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/29543
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| Title: | Limits to Arbitrage and Hedging: Evidence from Commodity Markets |
| Authors: | Acharya, Viral
Lochstoer, Lars
Ramadorai, Tarun |
| Issue Date: | 21-Jan-2010 |
| Series/Report no.: | FIN-09-035 |
| Abstract: | Motivated by the literature on limits-to-arbitrage, we build an
equilibrium model of commodity markets in which speculators are capital
constrained, and commodity producers have hedging demands for commodity
futures. Increases (decreases) in producers' hedging demand
(speculators' risk capacity) increase hedging costs via price-pressure
on futures, reduce producers' inventory holdings, and thus spot prices.
Consistent with our model, producers' default risk forecasts futures
returns,spot prices, and inventories in oil and gas market data from
1980-2006, and the component of the commodity futures risk premium
associated with producer hedging demand rises when speculative activity
reduces. We conclude that limits to financial arbitrage generate limits
to hedging by producers, and affect both asset and goods prices. |
| URI: | http://hdl.handle.net/2451/29543 |
| Appears in Collections: | Finance Working Papers
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