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The Futures Price of A Commodity and FIxed Supply

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  • Eldor, Rafael
  • Pines, David

Abstract

This note shows that in a general equilibrium model of homogeneous population with production risk, the futures price of a commodity which is in fixed supply is always below the expected futures spot price (e.g. normal backwardation). It also shows that the difference between the futures price and the expected spot price increases as the representative individual's risk aversion rises. An important application of this model is to the housing market since houses are in fixed supply in the short run and buying a house is like holding along position in a forward contract. Therefore, if population is homogeneous houses are not a good consumption hedge and housing prices are below expected rental prices.

Suggested Citation

  • Eldor, Rafael & Pines, David, 1986. "The Futures Price of A Commodity and FIxed Supply," Foerder Institute for Economic Research Working Papers 275400, Tel-Aviv University > Foerder Institute for Economic Research.
    • Handle: RePEc:ags:isfiwp:275400
    DOI: 10.22004/ag.econ.275400
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    References listed on IDEAS

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    1. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
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    5. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66(3), pages 233-233.
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    7. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
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