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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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Web page: http://www.journals.uchicago.edu/JPE/

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Cited by:
  1. Cartea, Álvaro & Figuerola, Marcelo G. & German, Hélyette, . "Modelling electricity prices with forward looking capacity constraints," Open Access publications from Universidad Carlos III de Madrid info:hdl:10016/12078, Universidad Carlos III de Madrid.
  2. 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.
  3. Mathews, John A., 2008. "Towards a sustainably certifiable futures contract for biofuels," Energy Policy, Elsevier, vol. 36(5), pages 1577-1583, May.
  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. 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.
  6. Hausken, Kjell, 2006. "Jack Hirshleifer: A Nobel Prize left unbestowed," European Journal of Political Economy, Elsevier, vol. 22(2), pages 251-276, June.
  7. 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.
  8. 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).
  9. 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.

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