Real Effects of Centralized Markets: Evidence From Steel Futures

Abstract

I study the real effects of centralized derivative markets using the staggered introduction of futures contracts for different steel products in the U.S. Employing a difference-in-differences strategy, I find that the arrival of centralized futures markets improves price transparency and risk management in the underlying product market: price dispersion decreases and steel producers increase their hedging activity. Moreover, market share is reallocated toward low-cost producers, while product prices, producers' profits, and valuations decrease. Overall, the results indicate that centralized futures markets foster competition in the product market.

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

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