An Equilibrium Analysis of Hedging with Liquidity Constraints, Speculation, and Government Price Subsidy in a Commodity Market  

Oleh:

Hansch, Oliver ; Naik, Narayan Y. ; Viswanathan, S.

Jenis: Article from Journal - ilmiah internasional
Dalam koleksi: The Journal of Finance (EBSCO) vol. 53 no. 5 (Oct. 1998), page 1705-1736.
Fulltext: p 1705.pdf (184.67KB)

Isi artikel

We develop a simple commodity model to analyze ~i! the effects of hedging with liquidity constraints, due to producers’ inability to bear unlimited trading losses, ~ii! the role of speculation in the process of risk allocation between consumers and producers, and ~iii! the equilibrium implications of government price subsidies to the producers. We find that ~1! liquidity constraints can cause futures prices to exhibit mean reversion, which then makes speculation profitable; ~2! speculation tends to make futures price volatility an increasing function of futures price; and ~3! government price subsidy, if actively hedged by the producers, serves to lower the futures risk premium and reduce futures volatility.

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