Real Effects of Centralized Markets: Evidence From Steel Futures

Abstract

I study the real effects of centralized derivative markets. Exploiting the staggered arrival of futures contracts for different steel products, I find that the introduction of centralized derivatives markets: i) decreases price dispersion in the product market, ii) increases the sensitivity of producers’ market shares to their production cost, and iii) decreases prices and producers’ profits. I also find that news pointing to the introduction of centralized markets decrease the stock prices of steel producers. These results are consistent with the predictions of existing theories, which point to the role of centralized futures markets in fostering product market competition.

Keywords: Centralized Markets, Commodity Derivatives, Real Effects, Product Markets

JEL Classification: G14, G23, G32, L11, L61