Not Available for Download

Fat Tails and Futures Markets Illiquidity: Theory and Evidence from Crude Oil and Natural Gas

Posted: 17 Jan 2008  

Daniel P. Ahn

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); Government of the United States of America - Department of State

Date Written: November 15, 2007

Abstract

This paper demonstrates how the presence of "fat" tails in the distribution of price innovations for deliverable goods can lead to unwillingness of risk-averse or capital-supervised speculators and loss-averse producers to provide supply in futures markets at longer horizons. In particular, the thickness of the tail must be greater than the order of risk aversion for these markets to fail. Then an empirical section demonstrates how the model's predictions match the empirically observed hump-shaped trading at short horizons and sparse trading at long horizons for NYMEX crude oil and natural gas futures. New mathematical techniques from majorization theory help solve the model in analytic closed form.

Keywords: Operational Risk, Energy Trading, Futures Contracts, Power Laws, Fat Tails, Market Failure

JEL Classification: G00, G10, G13, G20, G32

Suggested Citation

Ahn, Daniel P., Fat Tails and Futures Markets Illiquidity: Theory and Evidence from Crude Oil and Natural Gas (November 15, 2007). Available at SSRN: https://ssrn.com/abstract=1084248

Daniel P. Ahn (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

Government of the United States of America - Department of State ( email )

United States

Paper statistics

Abstract Views
1,154