An Equilibrium Model for Spot and Forward Prices of Commodities

42 Pages Posted: 7 Jun 2016

See all articles by Michail Anthropelos

Michail Anthropelos

University of Piraeus - Department of Banking and Financial Management

Michael Kupper

Humboldt University of Berlin - Department of Mathematics

Antonis Papapantoleon

Technische Universität Berlin (TU Berlin)

Date Written: June 2, 2016

Abstract

We consider a market model that consists of financial investors and producers of a commodity. Producers optionally store some production for future sale and go short on forward contracts to hedge the uncertainty of the future commodity price. Financial investors take positions in these contracts in order to diversify their portfolios. The spot and forward equilibrium commodity prices are endogenously derived as the outcome of the interaction between producers and investors. Assuming that both are utility maximizers, we first prove the existence of an equilibrium in an abstract setting. Then, in a framework where the consumers' demand and the exogenously priced financial market are correlated, we provide semi-explicit expressions for the equilibrium prices and analyze their dependence on the model parameters. The model can explain why increased investors' participation in forward commodity markets and higher correlation between the commodity and the stock market could result in higher spot prices and lower forward premia.

Keywords: commodities, equilibrium, spot and forward prices, forward premium, stock and commodity market correlation

JEL Classification: Q02, G13, G11, C62

Suggested Citation

Anthropelos, Michail and Kupper, Michael and Papapantoleon, Antonis, An Equilibrium Model for Spot and Forward Prices of Commodities (June 2, 2016). Available at SSRN: https://ssrn.com/abstract=2788508 or http://dx.doi.org/10.2139/ssrn.2788508

Michail Anthropelos (Contact Author)

University of Piraeus - Department of Banking and Financial Management ( email )

80 Karaoli & Dimitriou Str.
18534 Piraeus, 185 34 -GR
Greece

Michael Kupper

Humboldt University of Berlin - Department of Mathematics ( email )

Unter den Linden
Berlin, D-10099
Germany

Antonis Papapantoleon

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

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