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Futures markets, price stabilization and efficient exploitation of exhaustible resources

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Author Info
Erwin Bulte
Joost Pennings
Wim Heijman

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Abstract

Markets for natural resource futures contracts and cash forward contracts experience a rapid growth. According to theory, this should result in more efficient resource depletion, implying that price formation is more consistent with Hotelling's rule. The rationale of this stabilization effect is briefly discussed. Next, we analyze the impact of expanding futures markets on the behaviour of individual resource owners trading on the cash market. Using a simple pulse extraction model, we demonstrate that the expected time of depletion can shift to the present or the future, and that utility of exploitation can go up or down, as market prices are stabilized. Copyright Kluwer Academic Publishers 1996

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File URL: http://hdl.handle.net/10.1007/BF00339082
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Publisher Info
Article provided by European Association of Environmental and Resource Economists in its journal Environmental & Resource Economics.

Volume (Year): 8 (1996)
Issue (Month): 3 (October)
Pages: 351-366
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Handle: RePEc:kap:enreec:v:8:y:1996:i:3:p:351-366

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Related research
Keywords: efficiency; futures markets; natural resource management; price stabilisation; risk aversion;

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  1. Jarrow, Robert A. & Oldfield, George S., 1981. "Forward contracts and futures contracts," Journal of Financial Economics, Elsevier, vol. 9(4), pages 373-382, December. [Downloadable!] (restricted)
  2. Pindyck, Robert S, 1980. "Uncertainty and Exhaustible Resource Markets," Journal of Political Economy, University of Chicago Press, vol. 88(6), pages 1203-25, December. [Downloadable!] (restricted)
  3. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May. [Downloadable!] (restricted)
  4. Driskill, Robert & McCafferty, Stephen & Sheffrin, Steven M, 1991. "Speculative Intensity and Spot and Futures Price Variability," Economic Inquiry, Oxford University Press, vol. 29(4), pages 737-51, October.
  5. Slade, Margaret E., 1982. "Trends in natural-resource commodity prices: An analysis of the time domain," Journal of Environmental Economics and Management, Elsevier, vol. 9(2), pages 122-137, June. [Downloadable!] (restricted)
  6. Lewis, Tracy R., 1977. "Attitudes towards risk and the optimal exploitation of an exhaustible resource," Journal of Environmental Economics and Management, Elsevier, vol. 4(2), pages 111-119, June. [Downloadable!] (restricted)
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  7. Heal, Geoffrey & Barrow, Michael, 1980. "The Relationship between Interest Rates and Metal Price Movements," Review of Economic Studies, Blackwell Publishing, vol. 47(1), pages 161-81, January. [Downloadable!] (restricted)
  8. Farrow, Scott, 1985. "Testing the Efficiency of Extraction from a Stock Resource," Journal of Political Economy, University of Chicago Press, vol. 93(3), pages 452-87, June. [Downloadable!] (restricted)
  9. Gaudet, Gerard & Howitt, Peter, 1989. "A note on uncertainty and the hotelling rule," Journal of Environmental Economics and Management, Elsevier, vol. 16(1), pages 80-86, January. [Downloadable!] (restricted)
  10. Stollery, Kenneth R., 1983. "Mineral depletion with cost as the extraction limit: A model applied to the behavior of prices in the nickel industry," Journal of Environmental Economics and Management, Elsevier, vol. 10(2), pages 151-165, June. [Downloadable!] (restricted)
  11. Solow, Robert M, 1974. "The Economics of Resources or the Resources of Economics," American Economic Review, American Economic Association, vol. 64(2), pages 1-14, May.
  12. Agbeyegbe, Terence D., 1989. "Interest rates and metal price movements: Further evidence," Journal of Environmental Economics and Management, Elsevier, vol. 16(2), pages 184-192, March. [Downloadable!] (restricted)
  13. Pindyck, Robert S, 1981. " The Optimal Production of an Exhaustible Resource When Price is Exogenous and Stochastic," Scandinavian Journal of Economics, Blackwell Publishing, vol. 83(2), pages 277-88.
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  14. Smith, V. Kerry, 1981. "The empirical relevance of hotelling's model for natural resources," Resources and Energy, Elsevier, vol. 3(2), pages 105-117, October. [Downloadable!] (restricted)
  15. Sundaresan, Suresh M, 1984. "Equilibrium Valuation of Natural Resources," Journal of Business, University of Chicago Press, vol. 57(4), pages 493-518, October. [Downloadable!] (restricted)
  16. Halvorsen, Robert & Smith, Tim R, 1991. "A Test of the Theory of Exhaustible Resources," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 123-40, February. [Downloadable!] (restricted)
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