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A Rational Expectations Model of Time Varying Risk Premia in Commodities Futures Markets: Theory and Evidence

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Author Info
Beck, Stacie E

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Abstract

The intertemporal hedging theory is used to model the role of spot price risk, measured by the variance, in futures market risk premia. The model gives a theoretical basis for treating the variance as serially correlated when commodities are storable. T he rational expectations hypothesis implies that agents use the varianc e process to predict risk; therefore, the expected variance should be incorporated in equilibrium risk premia. Tests on data from four commodity markets show that variances do have predictable components ; however, premia are related to expected variances in only one market. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 34 (1993)
Issue (Month): 1 (February)
Pages: 149-68
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Handle: RePEc:ier:iecrev:v:34:y:1993:i:1:p:149-68

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  1. Stacie Beck, 2001. "Autoregressive conditional heteroscedasticity in commodity spot prices," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(2), pages 115-132. [Downloadable!]
  2. He, Dequan & Holt, Matt, 2004. "Efficiency Of Forest Commodity Futures Markets," 2004 Annual meeting, August 1-4, Denver, CO 20344, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  3. McKenzie, Andrew M. & Holt, Matthew T., 1998. "Market Efficiency In Agricultural Futures Markets," 1998 Annual meeting, August 2-5, Salt Lake City, UT 20933, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
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