Convective Risk Flows in Commodity Futures Markets

61 Pages Posted: 25 Mar 2012

See all articles by Ing-Haw Cheng

Ing-Haw Cheng

Dartmouth College - Tuck School of Business

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: March 2012

Abstract

This paper analyzes the joint responses of commodity futures prices and traders' futures positions to changes in the VIX before and after the recent financial crisis. We find that while financial traders accommodate the needs of commercial hedgers in normal times, in times of distress, financial traders reduce their net long positions in response to an increase in the VIX causing the risk to flow to commercial hedgers. By exploiting a cross-section of traders, we provide micro-level evidence for a convective flow of risk from distressed financial traders to the ultimate producers of commodities in the real economy.

Suggested Citation

Cheng, Ing-Haw and Kirilenko, Andrei A. and Xiong, Wei, Convective Risk Flows in Commodity Futures Markets (March 2012). NBER Working Paper No. w17921. Available at SSRN: https://ssrn.com/abstract=2028257

Ing-Haw Cheng (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

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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