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Are Hedgers Informed? An Examination of the Price Impact of Large Trades in Illiquid Agricultural Futures Markets

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  • Alex Frino
  • Andrew Lepone
  • Vito Mollica
  • Shunquan Zhang

Abstract

The “received” view in the finance literature is that hedgers are uninformed traders who use futures to fix future price movements and prevent losses from unexpected and unknown fluctuations in the purchase or sale price of a commodity. In this paper, we examine transactions executed by large traders in a relatively illiquid deliverable agricultural (grain) futures market where most transactions are executed by hedgers. We provide evidence that the price impact of large buyer‐initiated transactions is permanent, consistent with the proposition that they are executed by traders perceived to be informed. We also provide evidence that the price impact of large buyer‐initiated trades is greatest around announcements related to the underlying commodity—corroborating our conclusion that they are executed by traders perceived to be informed. This evidence is contrary to the “received” view in the literature that hedgers are uninformed, and implies that large long hedgers in agricultural futures markets are informed. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 36:612–622, 2016

Suggested Citation

  • Alex Frino & Andrew Lepone & Vito Mollica & Shunquan Zhang, 2016. "Are Hedgers Informed? An Examination of the Price Impact of Large Trades in Illiquid Agricultural Futures Markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 36(6), pages 612-622, June.
    • Handle: RePEc:wly:jfutmk:v:36:y:2016:i:6:p:612-622
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    Cited by:

    1. Yue Zhao & Difang Wan, 2018. "Institutional high frequency trading and price discovery: Evidence from an emerging commodity futures market," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 38(2), pages 243-270, February.
    2. Frino, Alex & Ibikunle, Gbenga & Mollica, Vito & Steffen, Tom, 2018. "The impact of commodity benchmarks on derivatives markets: The case of the dated Brent assessment and Brent futures," Journal of Banking & Finance, Elsevier, vol. 95(C), pages 27-43.
    3. Christina Sklibosios Nikitopoulos & Alice Carole Thomas & Jianxin Wang, 2024. "Hedging pressure and oil volatility: Insurance versus liquidity demands," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(2), pages 252-280, February.
    4. Hung, Jui-Cheng & Liu, Hung-Chun & Yang, J. Jimmy, 2021. "Trading activity and price discovery in Bitcoin futures markets," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 107-120.

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