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A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets

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  • WENJIN KANG
  • K. GEERT ROUWENHORST
  • KE TANG

Abstract

This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short‐term position changes are driven mainly by the liquidity demands of noncommercial traders, while long‐term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance.

Suggested Citation

  • Wenjin Kang & K. Geert Rouwenhorst & Ke Tang, 2020. "A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets," Journal of Finance, American Finance Association, vol. 75(1), pages 377-417, February.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:1:p:377-417
    DOI: 10.1111/jofi.12845
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