IDEAS home Printed from https://ideas.repec.org/p/ecl/wisagr/504.html
   My bibliography  Save this paper

Risk Premiums and the Storage of Agricultural Commodities

Author

Listed:
  • Lin, Hua

    (U of Wisconsin)

  • Fortenbery, T. Randall

Abstract

The existence of a commodity market risk premium has attracted the interest of researchers for several decades. Most attempts to measure risk premiums have been focused on futures markets. However, if the risk premium is a payment made by hedgers (as suggested by Keynes) to reduce their risk profile, then the risk being reduced originates in the cash market. This suggests that the risk premium may also originate in the cash market. As such, the search for a risk premium should focus on the cash market, and, given Working's Supply of Storage Curve, should be measured as a function of stored inventory. This paper develops an expected utility based model that separates the risk premium from other storage incentives, and illustrates the role of the cash market risk premium on the storage decisions of two different market agents.

Suggested Citation

  • Lin, Hua & Fortenbery, T. Randall, 2006. "Risk Premiums and the Storage of Agricultural Commodities," Staff Paper Series 504, University of Wisconsin, Agricultural and Applied Economics.
    • Handle: RePEc:ecl:wisagr:504
    as

    Download full text from publisher

    File URL: http://www.aae.wisc.edu/pubs/sps/pdf/stpap504.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    2. Peter Berck, 1981. "Portfolio Theory and the Demand for Futures: The Case of California Cotton," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(3), pages 466-474.
    3. Chavas, Jean-Paul, 1988. "On competitive speculation under uncertainty: An alternative view of the inverse-carrying charge," Journal of Economics and Business, Elsevier, vol. 40(2), pages 117-128, May.
    4. Jean-Paul Chavas & Paula M. Despins & T. Randy Fortenbery, 2000. "Inventory Dynamics under Transaction Costs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 260-273.
    5. Joost M. E. Pennings & Ale Smidts, 2003. "The Shape of Utility Functions and Organizational Behavior," Management Science, INFORMS, vol. 49(9), pages 1251-1263, September.
    6. B. Wade Brorsen, 1995. "Optimal Hedge Ratios with Risk-Neutral Producers and Nonlinear Borrowing Costs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 77(1), pages 174-181.
    7. T. Randall Fortenbery & Hector O. Zapata, 1997. "An evaluation of price linkages between futures and cash markets for cheddar cheese," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(3), pages 279-301, May.
    8. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-335, May.
    9. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
    10. Carter, Colin A & Rausser, Gordon C & Schmitz, Andrew, 1983. "Efficient Asset Portfolios and the Theory of Normal Backwardation," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 319-331, April.
    11. Holbrook Working, 1948. "Theory of the Inverse Carrying Charge in Futures Markets," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 30(1), pages 1-28.
    12. Nicholas Kaldor, 1939. "Speculation and Economic Stability," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 7(1), pages 1-27.
    13. Bruce Bjornson & Colin A. Carter, 1997. "New Evidence on Agricultural Commodity Return Performance under Time-Varying Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 918-930.
    14. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233-233.
    15. Richard Deaves & Itzhak Krinsky, 1995. "Do futures prices for commodities embody risk premiums?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(6), pages 637-648, September.
    16. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
    17. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    18. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," The Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-667.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kocagil, Ahmet E. & Topyan, Kudret, 1997. "An empirical note on demand for speculation and futures risk premium: A Kalman Filter application," Review of Financial Economics, Elsevier, vol. 6(1), pages 77-93.
    2. Miffre, Joëlle, 2016. "Long-short commodity investing: A review of the literature," Journal of Commodity Markets, Elsevier, vol. 1(1), pages 3-13.
    3. Cortazar, Gonzalo & Kovacevic, Ivo & Schwartz, Eduardo S., 2015. "Expected commodity returns and pricing models," Energy Economics, Elsevier, vol. 49(C), pages 60-71.
    4. Carter, Colin A., 1999. "Commodity futures markets: a survey," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 43(2), pages 1-39, June.
    5. Symeonidis, Lazaros & Prokopczuk, Marcel & Brooks, Chris & Lazar, Emese, 2012. "Futures basis, inventory and commodity price volatility: An empirical analysis," Economic Modelling, Elsevier, vol. 29(6), pages 2651-2663.
    6. Bredin, Don & O'Sullivan, Conall & Spencer, Simon, 2021. "Forecasting WTI crude oil futures returns: Does the term structure help?," Energy Economics, Elsevier, vol. 100(C).
    7. van den Goorbergh, R.W.J., 2004. "Essays on optimal hedging and investment strategies and on derivative pricing," Other publications TiSEM 4b4b16af-8621-463f-bbfa-0, Tilburg University, School of Economics and Management.
    8. Shi, Wei & Irwin, Scott H. & Good, Darrel L. & Dietz, Sarah N., 2005. "Wheat Forward Contract Pricing: Evidence on Forecast Power and Risk Premia," 2005 Conference, April 18-19, 2005, St. Louis, Missouri 19043, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    9. Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013. "The Fundamentals of Commodity Futures Returns," Review of Finance, European Finance Association, vol. 17(1), pages 35-105.
    10. Gonzalo Cortazar & Ivo Kovacevic & Eduardo S. Schwartz, 2013. "Commodity and Asset Pricing Models: An Integration," NBER Working Papers 19167, National Bureau of Economic Research, Inc.
    11. Ahmet E. Kocagil & Kudret Topyan, 1997. "An empirical note on demand for speculation and futures risk premium: A Kalman Filter application," Review of Financial Economics, John Wiley & Sons, vol. 6(1), pages 77-93.
    12. Secomandi, Nicola & Seppi, Duane J., 2014. "Real Options and Merchant Operations of Energy and Other Commodities," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 6(3-4), pages 161-331, July.
    13. Joelle Miffre, 2002. "The predictability of futures returns: rational variation in required returns or market inefficiency?," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 715-724.
    14. Guillermo Llorente & Jiang Wang, 2020. "Trading and information in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(8), pages 1231-1263, August.
    15. Nicole M. Moran & Scott H. Irwin & Philip Garcia, 2020. "Who Wins and Who Loses? Trader Returns and Risk Premiums in Agricultural Futures Markets," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(4), pages 611-652, December.
    16. Henry L. Bryant & David A. Bessler & Michael S. Haigh, 2006. "Causality in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(11), pages 1039-1057, November.
    17. Koch, Nicolas, 2014. "Tail events: A new approach to understanding extreme energy commodity prices," Energy Economics, Elsevier, vol. 43(C), pages 195-205.
    18. Pieroni, Luca & Ricciarelli, Matteo, 2008. "Modelling dynamic storage function in commodity markets: Theory and evidence," Economic Modelling, Elsevier, vol. 25(5), pages 1080-1092, September.
    19. Chaves, Denis B. & Viswanathan, Vivek, 2016. "Momentum and mean-reversion in commodity spot and futures markets," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 39-53.
    20. Valenti, Daniele & Manera, Matteo & Sbuelz, Alessandro, 2020. "Interpreting the oil risk premium: Do oil price shocks matter?," Energy Economics, Elsevier, vol. 91(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecl:wisagr:504. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/dauwius.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.