Returns to Traders and Existences of a Risk Premium of a Risk Premium in Agricultural Futures Markets

57 Pages Posted: 26 May 2011

See all articles by Nicole Aulerich

Nicole Aulerich

Commodity Futures Trading Commission (CFTC)

Scott H. Irwin

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Date Written: May 23, 2011

Abstract

The purpose of the study is to examine the existence of a risk premium in futures markets to determine if hedgers pay speculators for protection against adverse price movements. Hartzmark (1987) addressed this same question but his time period of study from 1977 to 1981 is limited and outdated. The current state of the futures markets is quite different today than in was in the late 1970s. The data for this study extends from January 2000 to September 2009 and covers 12 commodity markets. The profitability of aggregate trader groups is calculated using end of day positions and prices for individual commodities; these commodities are then grouped according to price patterns over the sample period into three groups including grains (corn, soybeans, soybean oil, and wheat contracts), livestock (feeder cattle, lean hogs, and live cattle) in addition to cotton, and soft commodities (cocoa, coffee, and sugar). More importantly, long passive traders, called commodity index traders (CITs) emerged into the futures markets during 2004 and 2005 and provide a natural experiment to determine if naïvely holding positions opposite of hedgers results in positive profits and thereby evidence of a risk premium. Results do not find convincing evidence of the existence of a positive risk premium.

Keywords: commodities, futures markets, risk premium, commodity index traders

JEL Classification: D84, G12, G13, Q13, Q14

Suggested Citation

Aulerich, Nicole and Irwin, Scott H. and Garcia, Philip, Returns to Traders and Existences of a Risk Premium of a Risk Premium in Agricultural Futures Markets (May 23, 2011). Available at SSRN: https://ssrn.com/abstract=1850889 or http://dx.doi.org/10.2139/ssrn.1850889

Nicole Aulerich (Contact Author)

Commodity Futures Trading Commission (CFTC) ( email )

1155 21st Street NW
Washington, DC 20581
United States

Scott H. Irwin

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
326 Mumford Hall, MC-710
Urbana, IL 61801
United States

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
427 Mumford Hall
Urbana, IL 61801
United States
217-333-0644 (Phone)
217-333-5538 (Fax)

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