Risk, Futures Pricing, and the Organization of Production in Commodity Markets

Posted: 1 Dec 2008

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Abstract

This paper examines equilibrium in a spot and futures market with both primary producers (growers) and intermediate producers (processors). For a commodity that is subject to output shocks, processors tend to hedge long, in contrast with Hick's theory of futures hedging. Nevertheless, if transaction costs are low, the two-stage production process brings about a downward futures price bias, consistent with Hick's pricing prediction. But if costs of trading futures are high, growers tend to be differentially driven from the futures market, reversing the direction of the bias. Futures trading may also affect the organization of industry; when demand is inelastic, futures trading can serve as a substitute for vertical integration as a means of diversifying risk because the risk positions of growers are complementary with those of processors.

Suggested Citation

Hirshleifer, David A., Risk, Futures Pricing, and the Organization of Production in Commodity Markets. Journal of Political Economy, 96(6), December (1988):1206-1220.. Available at SSRN: https://ssrn.com/abstract=1279668

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
450
PlumX Metrics