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Incomplete Markets and Commodity-Linked Finance in Developing Countries

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  • Myers, Robert J

Abstract

This article provides a framework for appraising new financial instruments and evaluating the extent to which they can help alleviate problems of incomplete credit markets and contingent claims markets in developing countries. Although the issues involved apply to any new financial instrument, the author gives particular attention to commodity-linked securities because many developing countries specialize in producing a handful of primary commodities and are therefore exposed to substantial commodity price risks. The article looks at the supply of, demand for, and pricing of commodity-linked securities and discusses some issues that affect their use by developing countries: their special legal status as sovereign debt; their feasibility (since to become truly effective they will require liquid secondary markets); and the construction of an optimal portfolio of external debt obligations. It also discusses the potential for new financial instruments--particularly commodity-linked securities--as a tool for risk management in developing countries. Copyright 1992 by Oxford University Press.

Suggested Citation

  • Myers, Robert J, 1992. "Incomplete Markets and Commodity-Linked Finance in Developing Countries," The World Bank Research Observer, World Bank, vol. 7(1), pages 79-94, January.
    • Handle: RePEc:oup:wbrobs:v:7:y:1992:i:1:p:79-94
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    Cited by:

    1. Shee, Apurba & Turvey, Calum G., 2008. "Commodity Linked Credit: A Risk Management Instrument for the Agrarians in India," 2007 Agricultural and Rural Finance Markets in Transition, October 4-5, 2007, St. Louis, Missouri 48139, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    2. Broll, Udo & Wahl, Jack E., 1995. "Missing risk sharing markets and the benefits of cross hedging in developing countries," Discussion Papers, Series II 284, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    3. Jane Mpapalika, 2020. "Alternative Financing Instruments for African Economies," 2020 Papers pmp2, Job Market Papers.
    4. Broll, Udo & Wahl, Jack E., 1998. "Missing risk sharing markets and the benefits of cross-hedging in developing countries," Journal of Development Economics, Elsevier, vol. 55(1), pages 43-56, February.
    5. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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