|
|
|
|
||||
|
||||
Futures Market Failure?Philip GarciaUniversity of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics Scott H. IrwinUniversity of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics Aaron SmithUniversity of California, Davis - Department of Agricultural and Resource Economics October 25, 2011 Abstract: In a well-functioning futures market, the futures price at expiration equals the price of the underlying asset. This condition failed to hold in grain markets for most of 2005-10. During this period, futures contracts expired up to 35% above the cash grain price. We develop a rational expectations model to show how non-convergence arises from a wedge between the price of storing the physical commodity and the cost of carrying the delivery instrument. This wedge is the coupon in a present value equation, so our results exemplify a significant financial market in which a present value model explains prices.
Number of Pages in PDF File: 40 Keywords: finance, agriculture, commodity futures, delivery, grain, storage, present value, asset pricing JEL Classification: G13, G14, Q11, Q13 working papers seriesDate posted: October 28, 2011Suggested CitationContact Information
|
|
||||||||||||||||||
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
FAQ
Terms of Use
Privacy Policy
Copyright
This page was processed by apollo8 in 0.437 seconds
