A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets
Journal of Finance, Forthcoming
61 Pages Posted: 14 Jun 2014 Last revised: 22 Apr 2019
Date Written: April 19, 2019
This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short-term position changes are mainly driven by the liquidity demands of non-commercial traders, while long-term variation is primarily driven by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.
Keywords: Commodity futures, liquidity provision, return predictability, theory of normal backwardation, hedging pressure, risk premium
Suggested Citation: Suggested Citation