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Futures Trading, Storage, and the Division of Risk: A Multiperiod Analysis

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  • Hirshleifer, David

Abstract

This paper analyzes the interaction of storage and futures trading when producers make decisions covering many harvests. In this more general context, by examining how risks are distributed between storers and growers, results are obtained that differ dramatically from previous models in the literature. When storage is costly, storers may reduce risk by taking long hedging positions, rather than selling inventories short. Contrary to the conventional view (in a tradition beginning with J. M. Keynes and J. R. Hicks), costless storage does not imply downward bias of futures prices (" normal backwardation"). Hedging against the optimally varying planting costs promotes upward price bias (" contango"), while hedging against storage costs to be incurred promotes downward bias. When the risks faced by growers and storers are negatively correlated, futures trading can substitute for vertical integration as a means of reducing risk. Copyright 1989 by Royal Economic Society.

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  • Hirshleifer, David, 1989. "Futures Trading, Storage, and the Division of Risk: A Multiperiod Analysis," Economic Journal, Royal Economic Society, vol. 99(397), pages 700-719, September.
    • Handle: RePEc:ecj:econjl:v:99:y:1989:i:397:p:700-719
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    Cited by:

    1. Klumpp, Tilman, 2021. "Stockpiling and Shortages (the “Toilet Paper Paper")," Working Papers 2021-2, University of Alberta, Department of Economics.
    2. Richard Heaney, 1998. "A Test of the cost‐of‐carry relationship using the London Metal Exchange lead contract," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(2), pages 177-200, April.
    3. Mohammad Isleimeyyeh, 2020. "The role of financial investors in determining the commodity futures risk premium," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(9), pages 1375-1397, September.
    4. repec:dau:papers:123456789/11383 is not listed on IDEAS
    5. Bernard Michael Gilroy, 1991. "Schweizerische Pflichtlagerhaltung und ihre Finanzierung," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 127(III), pages 431-443, September.
    6. Hennessy, David A., 1996. "Information Asymmetry As a Reason for Vertical Integration," Staff General Research Papers Archive 10422, Iowa State University, Department of Economics.
    7. Pennings, Joost M. E. & Heijman, Willem J. M., 1995. "Prospects for an electricity futures market A comment," Resources Policy, Elsevier, vol. 21(4), pages 283-284, December.
    8. Filippo Natoli, 2018. "Analyzing the structural transformation of commodity markets: financialization revisited," Questioni di Economia e Finanza (Occasional Papers) 419, Bank of Italy, Economic Research and International Relations Area.
    9. Shimeng Shi, 2022. "Bitcoin futures risk premia," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(12), pages 2190-2217, December.
    10. Ivar Ekeland & Delphine Lautier & Bertrand Villeneuve, 2019. "Hedging pressure and speculation in commodity markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 68(1), pages 83-123, July.
    11. Filippo Natoli, 2021. "Financialization Of Commodities Before And After The Great Financial Crisis," Journal of Economic Surveys, Wiley Blackwell, vol. 35(2), pages 488-511, April.
    12. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
    13. Fabrizio Ferriani & Filippo Natoli & Giovanni Veronese & Federica Zeni, 2019. "Risk premium in the era of shale oil," Temi di discussione (Economic working papers) 1215, Bank of Italy, Economic Research and International Relations Area.
    14. Barrales-Ruiz, Jose & Mohammed, Mikidadu, 2021. "Financial regimes and oil prices," Resources Policy, Elsevier, vol. 74(C).
    15. Michail Anthropelos & Michael Kupper & Antonis Papapantoleon, 2018. "An Equilibrium Model for Spot and Forward Prices of Commodities," Mathematics of Operations Research, INFORMS, vol. 43(1), pages 152-180, February.
    16. Yao, Wei & Alexiou, Constantinos, 2024. "On the transmission mechanism between the inventory arbitrage activity, speculative activity and the commodity price under the US QE policy: Evidence from a TVP-VAR model," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1054-1072.
    17. Steven D. Baker, 2021. "The Financialization of Storable Commodities," Management Science, INFORMS, vol. 67(1), pages 471-499, January.
    18. Méndez Parra, Maximiliano, 2015. "Futures prices, trade and domestic supply of agricultural commodities," Economics PhD Theses 0115, Department of Economics, University of Sussex Business School.
    19. Boum-Jong Choe, 1992. "The precautionary demand for commodity stocks," Policy Research Working Paper Series 935, The World Bank.
    20. Considine, Jennifer & Galkin, Philipp & Aldayel, Abdullah, 2022. "Inventories and the term structure of oil prices: A complex relationship," Resources Policy, Elsevier, vol. 77(C).
    21. Ivar Ekeland & Delphine Lautier & Bertrand Villeneuve, 2013. "A simple equilibrium model for a commodity market with spot trades and futures contracts," Post-Print hal-01655807, HAL.

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