The Financialization of the Term Structure of Risk Premia in Commodity Markets

RR-FIME Working Paper 17-02

39 Pages Posted: 26 Sep 2016 Last revised: 19 Feb 2017

See all articles by Edouard Jaeck

Edouard Jaeck

Université Paris Dauphine - Department of Finance; EDF Energy - Finance for Energy Market Research Centre

Date Written: January 31, 2017

Abstract

In this paper, I examine how financialization affects the term structure of risk premia by using an equilibrium model for commodity futures markets. I define financialization as the entry of cross-asset investors, who are exposed to a commodity risk, into a commodity market. Qualitatively, the model shows that the financialization decreases the segmentation between commodity markets and the stock market. It also shows that speculators and investors both provide and consume liquidity and that the investment pressure from investors creates new risk premia. Further the model shows that financialization affects the entire term structure of risk premia. Quantitatively, these effects depend on the physical characteristics of the commodity market under study.

Keywords: Commodity Markets, Financialization, Futures Prices, Risk premia

JEL Classification: G11, G12, G13

Suggested Citation

Jaeck, Edouard, The Financialization of the Term Structure of Risk Premia in Commodity Markets (January 31, 2017). RR-FIME Working Paper 17-02, Available at SSRN: https://ssrn.com/abstract=2843464 or http://dx.doi.org/10.2139/ssrn.2843464

Edouard Jaeck (Contact Author)

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France

EDF Energy - Finance for Energy Market Research Centre ( email )

France

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