Abstract

http://ssrn.com/abstract=1279626
 
 

Citations



 


 



Residual Risk, Trading Costs and Commodity Futures Risk Premia


David A. Hirshleifer


University of California, Irvine - Paul Merage School of Business


Review of Financial Studies, Vol. 2, pp. 173-193, Summer 1988

Abstract:     
Trading costs, in the form either of explicit charges or of the costs of becoming informed, limit the participation of some classes of traders in commodity futures markets. When speculators face a fixed cost of participating in a futures market that is used by commodity producers to hedge their stochastic revenues, the futures risk premium deviates from the perfect markets prediction. The deviation rises in absolute value with the square root of the trading cost and with the standard deviation of residual returns, and it is unrelated to the covariance of the futures price with producers' nonmarketable wealths. The residual-risk premium depends not on the total magnitude of the risk that producers hedge (i.e., aggregate revenue variance), but on the variability of their revenue relative to its mean (i.e., the coefficient of variation). Hence, even a commodity that constitutes a minor fraction of aggregate consumption may have a large premium for residual risk if the revenue derived from it has a large coefficient of variation.

Accepted Paper Series


Not Available For Download

Date posted: December 3, 2008  

Suggested Citation

Hirshleifer, David A., Residual Risk, Trading Costs and Commodity Futures Risk Premia. Review of Financial Studies, Vol. 2, pp. 173-193, Summer 1988. Available at SSRN: http://ssrn.com/abstract=1279626

Contact Information

David A. Hirshleifer (Contact Author)
University of California, Irvine - Paul Merage School of Business ( email )
Irvine, CA California 92697-3125
United States
Feedback to SSRN


Paper statistics
Abstract Views: 544

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.297 seconds