Convective Risk Flows in Commodity Futures Markets
University of Michigan - Ross School of Business
Andrei A. Kirilenko
MIT Sloan School of Management
Princeton University - Department of Economics; National Bureau of Economic Research (NBER)
December 11, 2012
AFA 2013 San Diego Meetings Paper
This paper analyzes the joint responses of commodity futures prices and traders’ futures positions to changes in the VIX before and after the recent financial crisis. We find that while financial traders accommodate the needs of commercial hedgers in normal times, in times of distress, financial traders reduce their net long positions in response to an increase in the VIX causing the risk to flow to commercial hedgers. By exploiting a cross-section of traders, we provide micro-level evidence for a convective flow of risk from distressed financial traders to commercial hedgers. The presence of such risk convection confirms the market impact of financial traders conditional on trades initiated by them and motivates an extension of the long-standing hedging pressure theory of commodity futures markets to incorporate time-varying risk capacities of financial traders.
Keywords: systemic risk, commodity index traders, hedging pressure
JEL Classification: G12, G01, G20, G14working papers series
Date posted: March 7, 2012 ; Last revised: March 21, 2013
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