Commodity Index Trading and Hedging Costs
43 Pages Posted: 18 Dec 2010 Last revised: 15 May 2012
Date Written: April 17, 2012
Abstract
Trading by commodity index traders (CITs) has become an important aspect of financial markets over the past 10 years. We develop an equilibrium model of trader behavior that relates uninformed CIT trading to futures prices. The model predicts that CIT trading reduces the cost of hedging. We test the model using a unique non-public dataset which precisely identifies trader positions. We find evidence, consistent with the model, that index traders have become an important supply of price risk insurance.
(Second Draft)
Keywords: index trading, hedging, limits to arbitrage, backwardation
JEL Classification: G11, G12, G13
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
The Tactical and Strategic Value of Commodity Futures
By Claude B. Erb and Campbell R. Harvey
-
The Tactical and Strategic Value of Commodity Futures
By Claude B. Erb and Campbell R. Harvey
-
The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability
-
The Fundamentals of Commodity Futures Returns
By Gary B. Gorton, Fumio Hayashi, ...
-
The Fundamentals of Commodity Futures Returns
By Gary B. Gorton, Fumio Hayashi, ...
-
Momentum Strategies in Commodity Futures Markets
By Joƫlle Miffre and Georgios Rallis
