Commodity Futures Contract Viability: A Multidisciplinary Approach

Office for Futures and Options Research (OFOR), Working Paper No. 99-02

40 Pages Posted: 24 Sep 1999

See all articles by Joost M. E. Pennings

Joost M. E. Pennings

Maastricht University; Wageningen UR

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign

Abstract

We propose a development process of commodity futures contracts in which the decisions and wishes of potential customers are investigated simultaneously with the necessary technical properties that need to be met for trading to take place. Within this framework the relationship between trading volume and hedging effectiveness is examined taking both basis risk and market depth risk into account, and the relationship between owner-manager's characteristics and the probability of using futures is examined, taking latent variables and the heterogeneity of owner-managers into account. The relationships are tested on a set of data gathered in a stratified sample of 440 owner-managers by means of computer-assisted personal interviews and on transaction-specific futures data. Structural equation models and multiple regression models are used to validate the relationships. The hedging effectiveness and the variables that play a role in the owner-manager's use of futures are related to the tools of the exchange.

JEL Classification: G13

Suggested Citation

Pennings, Joost M. E. and Leuthold, Raymond M., Commodity Futures Contract Viability: A Multidisciplinary Approach. Office for Futures and Options Research (OFOR), Working Paper No. 99-02. Available at SSRN: https://ssrn.com/abstract=176769 or http://dx.doi.org/10.2139/ssrn.176769

Joost M. E. Pennings (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

Wageningen UR ( email )

Hollandseweg 1
Wageningen, 6706KN
Netherlands

Raymond M. Leuthold

University of Illinois @ Urbana-Champaign ( email )

1301 W. Gregory Drive
326 Mumford Hall
Urbana, IL 61801
United States
217-333-1810 (Phone)
217-333-5538 (Fax)

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