Premium
A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets
Author(s) -
KANG WENJIN,
ROUWENHORST K. GEERT,
TANG KE
Publication year - 2020
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12845
Subject(s) - futures contract , speculation , market liquidity , economics , financial economics , commodity , forward market , futures market , spread trade , position (finance) , risk premium , monetary economics , finance , institutional investor , corporate governance , open end fund
This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short‐term position changes are driven mainly by the liquidity demands of noncommercial traders, while long‐term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.