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The Theory of Normal Backwardation and Financialization of the Futures Markets

In: Modern Agricultural and Resource Economics and Policy

Author

Listed:
  • Colin A. Carter

    (University of California)

  • Cesar Revoredo-Giha

    (Rural Development, Environment and Society Department)

Abstract

Over the past 20 years there has been a large inflow of investment capital into commodity futures markets, a phenomenon known as the financialization of commodities. The purpose of this chapter is to analyse the behavior of commodity futures returns before and since financialization of the markets. In contrast with most of the literature that treats commodities as individual assets, this chapter models futures contracts as part of a balanced portfolio that includes other assets (equities and other commodities) and we control for weekly changes in speculative positions similar to Carter et al. (1983). In this study we allow for two factors giving rise to futures premiums: hedging pressure and systematic risk. We find that the recent poor returns to managed futures trading coincided with a suppressed risk premium.

Suggested Citation

  • Colin A. Carter & Cesar Revoredo-Giha, 2022. "The Theory of Normal Backwardation and Financialization of the Futures Markets," Natural Resource Management and Policy, in: Harry de Gorter & Jill McCluskey & Johan Swinnen & David Zilberman (ed.), Modern Agricultural and Resource Economics and Policy, pages 391-414, Springer.
    • Handle: RePEc:spr:nrmchp:978-3-030-77760-9_16
    DOI: 10.1007/978-3-030-77760-9_16
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    Cited by:

    1. Carter, Colin A. & Revoredo-Giha, Cesar, 2023. "Financialization and speculators risk premia in commodity futures markets," International Review of Financial Analysis, Elsevier, vol. 88(C).

    More about this item

    Keywords

    G130; Q020; Q14;
    All these keywords.

    JEL classification:

    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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