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Risk, Futures Pricing, and the Organization of Production in Commodity Markets

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  • Hirshleifer, David

Abstract

This paper examines equilibrium in a spot and futures market with both primary producers (growers) and intermediate producers (processo rs). For a commodity that is subject to output shocks, processors tend to hedge long, in contrast with J. R. Hicks's theory of futures hedging. Nevertheless, if transaction costs are low, the two-stage production process brings about a downward futures price bias, consistent with Hicks's pricing prediction. But if costs of trading futures are high, growers tend to be differentially driven from the futures market, reversing the direction of the bias. Futures trading may also affect the organization of industry. Copyright 1988 by University of Chicago Press.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 96 (1988)
Issue (Month): 6 (December)
Pages: 1206-20

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Handle: RePEc:ucp:jpolec:v:96:y:1988:i:6:p:1206-20

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Cited by:
  1. Jin, Hyun J. & Koo, Won W., 2006. "Offshore hedging strategy of Japan-based wheat traders under multiple sources of risk and hedging costs," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 220-236, March.
  2. Alvaro Cartea & Marcelo G. Figueroa & Helyette Geman, 2008. "Modelling Electricity Prices with Forward Looking Capacity Constraints," Birkbeck Working Papers in Economics and Finance 0802, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. 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.
  4. Colin A. Carter & Gordon C. Rausser & Aaron Smith, 2011. "Commodity Booms and Busts," Annual Review of Resource Economics, Annual Reviews, vol. 3(1), pages 87-118, October.
  5. Garfinkel, Jon A. & Hankins, Kristine Watson, 2011. "The role of risk management in mergers and merger waves," Journal of Financial Economics, Elsevier, vol. 101(3), pages 515-532, September.
  6. Pennings, Joost M. E., 2004. "A marketing-finance approach towards industrial channel contract relationships: a model and application," Journal of Business Research, Elsevier, vol. 57(6), pages 601-609, June.
  7. Mathews, John A., 2008. "Towards a sustainably certifiable futures contract for biofuels," Energy Policy, Elsevier, vol. 36(5), pages 1577-1583, May.
  8. Meunier, Guy, 2013. "Risk aversion and technology mix in an electricity market," Energy Economics, Elsevier, vol. 40(C), pages 866-874.
  9. 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.
  10. Guy Meunier, 2014. "Risk Aversion and Technology Portfolios," Review of Industrial Organization, Springer, vol. 44(4), pages 347-365, June.
  11. Frechette, Darren L., 2000. "Hedging With Futures And Options: A Demand Systems Approach," 2000 Conference, April 17-18 2000, Chicago, Illinois 18941, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  12. Roe, Terry & Somwaru, Agapi & Diao, Xinshen, 2002. "Do direct payments have intertemporal effects on U.S. agriculture?," TMD discussion papers 104, International Food Policy Research Institute (IFPRI).
  13. Hausken, Kjell, 2006. "Jack Hirshleifer: A Nobel Prize left unbestowed," European Journal of Political Economy, Elsevier, vol. 22(2), pages 251-276, June.

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