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Normal Backwardation and the Inventory Effect

Author

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  • Fort, Rodney D
  • Quirk, James

Abstract

The existence of backwardation in futures markets remains an intriguing and controv ersial issue. The authors show that a backwardation equilibrium can o ccur in a true futures market when participants are identical (degree of risk aversion, level of commodity commitments for long and short hedgers, or probability beliefs) using Hendrik J. Houthakker's comple tely neglected notion of an inventory effect that results in a patter n in the nearness of cash and futures prices over the harvest cycle. Copyright 1988 by University of Chicago Press.

Suggested Citation

  • Fort, Rodney D & Quirk, James, 1988. "Normal Backwardation and the Inventory Effect," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 81-99, February.
    • Handle: RePEc:ucp:jpolec:v:96:y:1988:i:1:p:81-99
    DOI: 10.1086/261525
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    Cited by:

    1. Röthig, Andreas, 2008. "The Impact of Backwardation on Hedgers' Demand for Currency Futures Contracts: Theory versus Empirical Evidence," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 35698, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. Röthig, Andreas, 2008. "The impact of backwardation on hedgers' demand for currency futures contracts: theory versus empirical evidence," Darmstadt Discussion Papers in Economics 190, Darmstadt University of Technology, Department of Law and Economics.
    3. Lien, Donald & Tse, Yiu Kuen, 2006. "A survey on physical delivery versus cash settlement in futures contracts," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 15-29.
    4. Andreas Röthig, 2009. "Microeconomic Risk Management and Macroeconomic Stability," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-01565-6, October.
    5. Joel G. Maxcy, 2004. "Contract Length as Risk Management When Labor is not Homogeneous," LABOUR, CEIS, vol. 18(2), pages 177-189, June.

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