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


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  • Hirshleifer, David


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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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 99 (1989)
Issue (Month): 397 (September)
Pages: 700-719

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Handle: RePEc:ecj:econjl:v:99:y:1989:i:397:p:700-719

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Cited by:
  1. Boum-Jong Choe, 1992. "The precautionary demand for commodity stocks," Policy Research Working Paper Series 935, The World Bank.
  2. 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.
  3. David A. HENNESSY, 1997. "Information Asymmetry As A Reason For Vertical Integration," Department of Resource Economics Regional Research Project 963, University of Massachusetts.
  4. Gilroy, Bernard Michael, 1991. "Schweizerische Pflichtlagerhaltung und ihre Finanzierung
    [Swiss obligatory stockpiling and its financing]
    ," MPRA Paper 21083, University Library of Munich, Germany.
  5. 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.
  6. Ekeland, Ivar & Lautier, Delphine & Villeneuve, Bertrand, 2013. "A simple equilibrium model for a commodity market with spot trades and futures contracts," Economics Papers from University Paris Dauphine 123456789/11383, Paris Dauphine University.


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