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

See all articles by Wenjin Kang

Wenjin Kang

School of Finance, Shanghai University of Finance and Economics

K. Geert Rouwenhorst

Yale School of Management - International Center for Finance

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Date Written: April 19, 2019

Abstract

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

Kang, Wenjin and Rouwenhorst, K. Geert and Tang, Ke, A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets (April 19, 2019). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2449315 or http://dx.doi.org/10.2139/ssrn.2449315

Wenjin Kang

School of Finance, Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

K. Geert Rouwenhorst (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6046 (Phone)
203-432-8931 (Fax)

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

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