Abstract

http://ssrn.com/abstract=1105546
 
 

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Limits to Arbitrage and Hedging: Evidence from Commodity Markets


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Tarun Ramadorai


Imperial College london; Centre for Economic Policy Research (CEPR)

Lars A. Lochstoer


University of California, Los Angeles (UCLA) - Anderson School of Management

January 17, 2010

EFA 2009 Bergen Meetings Paper
AFA 2010 Atlanta Meetings Paper

Abstract:     
We build an equilibrium model with commodity producers who are averse to future cash flow variability, and hedge using futures. Their hedging demand is met by risk-constrained speculators. Increases in producers' hedging demand (speculators' risk- capacity) increase hedging costs via price-pressure on futures, reducing producers' inventory holdings, and thus spot prices. Consistent with our model, in oil and gas data from 1980-2006 producers' default risk forecasts hedging demand, futures risk-premia and spot prices; more so when speculative activity is lower. We conclude that limits to financial arbitrage can generate limits to hedging by firms, affecting prices in both asset and goods markets.

Number of Pages in PDF File: 57

Keywords: Corporate Hedging, Commodity Pricing, Default Risk, Incomplete Markets, Limits to Arbitrage


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Date posted: March 14, 2008 ; Last revised: December 15, 2015

Suggested Citation

Acharya, Viral V. and Ramadorai, Tarun and Lochstoer, Lars A., Limits to Arbitrage and Hedging: Evidence from Commodity Markets (January 17, 2010). EFA 2009 Bergen Meetings Paper; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1105546 or http://dx.doi.org/10.2139/ssrn.1105546

Contact Information

Viral V. Acharya
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Tarun Ramadorai
Imperial College london ( email )
South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom
HOME PAGE: http://www.tarunramadorai.com
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Lars A. Lochstoer (Contact Author)
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
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References:  65
Citations:  21

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