Convective Risk Flows in Commodity Futures Markets

Forthcoming, Review of Finance

AFA 2013 San Diego Meetings Paper

51 Pages Posted: 7 Mar 2012 Last revised: 9 Sep 2014

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

University of Toronto - Rotman School of Management

Andrei A. Kirilenko

University of Cambridge - Finance

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 8, 2014

Abstract

We study the joint responses of commodity futures prices and positions of various trader groups to changes of the CBOE Volatility Index (VIX) before and after the recent financial crisis. Financial traders reduced their net long positions during the crisis in response to market distress, while hedgers facilitated this by reducing their net short positions as prices fell. This convective risk flow induced by the greater distress of financial institutions led to a change in the allocation of risk with hedgers holding more risk than they did previously. The presence of such a risk flow confirms the market impact of financial traders conditional on trades they initiate.

Keywords: systemic risk, commodity index traders, hedging pressure

JEL Classification: G12, G01, G20, G14

Suggested Citation

Cheng, Ing-Haw and Kirilenko, Andrei A. and Xiong, Wei, Convective Risk Flows in Commodity Futures Markets (September 8, 2014). Forthcoming, Review of Finance, AFA 2013 San Diego Meetings Paper, Available at SSRN: https://ssrn.com/abstract=2018037 or http://dx.doi.org/10.2139/ssrn.2018037

Ing-Haw Cheng (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://inghawcheng.github.io

Andrei A. Kirilenko

University of Cambridge - Finance ( email )

Cambridge
United Kingdom

HOME PAGE: http://https://www.jbs.cam.ac.uk/faculty-research/faculty-a-z/andrei-kirilenko/

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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