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Convective Risk Flows in Commodity Futures Markets

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  • Ing-Haw Cheng
  • Andrei Kirilenko
  • Wei Xiong

Abstract

This paper analyzes the joint responses of commodity futures prices and traders’ futures positions to changes in the VIX before and after the recent financial crisis. We find that while financial traders accommodate the needs of commercial hedgers in normal times, in times of distress, financial traders reduce their net long positions in response to an increase in the VIX causing the risk to flow to commercial hedgers. By exploiting a cross-section of traders, we provide micro-level evidence for a convective flow of risk from distressed financial traders to the ultimate producers of commodities in the real economy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 17921.

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Date of creation: Mar 2012
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Handle: RePEc:nbr:nberwo:17921

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References

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  1. John H. Cochrane, 2011. "Discount Rates," NBER Working Papers 16972, National Bureau of Economic Research, Inc.
  2. David Hirshleifer, 1988. "Residual Risk, Trading Costs, and Commodity Futures Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 173-193.
  3. Roon, F.A. de & Nijman, T.E. & Veld, C.H., 2000. "Hedging pressure effects in futures markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-83944, Tilburg University.
  4. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  5. John H. Cochrane, 2011. "Presidential Address: Discount Rates," Journal of Finance, American Finance Association, vol. 66(4), pages 1047-1108, 08.
  6. Albert S. Kyle, 2001. "Contagion as a Wealth Effect," Journal of Finance, American Finance Association, vol. 56(4), pages 1401-1440, 08.
  7. Kenneth A. Froot & David S. Scharfstein & Jeremy C. Stein, 1992. "Risk Management: Coordinating Corporate Investment and Financing Policies," NBER Working Papers 4084, National Bureau of Economic Research, Inc.
  8. Zhiguo He & In Gu Khang & Arvind Krishnamurthy, 2010. "Balance Sheet Adjustments during the 2008 Crisis," IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 118-156, August.
  9. Zhiguo He & In Gu Khang & Arvind Krishnamurthy, 2010. "Balance Sheet Adjustments in the 2008 Crisis," NBER Working Papers 15919, National Bureau of Economic Research, Inc.
  10. Scott H. Irwin & Dwight R. Sanders, 2011. "Index Funds, Financialization, and Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 1-31.
  11. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
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Citations

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Cited by:
  1. Miffre, Joëlle & Brooks, Chris, 2013. "Do long-short speculators destabilize commodity futures markets?," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 230-240.
  2. Silvennoinen, Annastiina & Thorp, Susan, 2013. "Financialization, crisis and commodity correlation dynamics," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 42-65.
  3. Acharya, Viral V. & Lochstoer, Lars & Ramadorai, Tarun, 2009. "Limits to Arbitrage and Hedging: Evidence from Commodity Markets," CEPR Discussion Papers 7327, C.E.P.R. Discussion Papers.
  4. Kondor, Péter & Vayanos, Dimitri, 2014. "Liquidity Risk and the Dynamics of Arbitrage Capital," CEPR Discussion Papers 9885, C.E.P.R. Discussion Papers.
  5. Irwin, Scott H., 2012. "Does the Masters Hypothesis Explain Recent Food Price Spikes?," Working Papers 126944, Structure and Performance of Agriculture and Agri-products Industry (SPAA).
  6. Nicole M. Aulerich & Scott H. Irwin & Philip Garcia, 2013. "Bubbles, Food Prices, and Speculation: Evidence from the CFTC’s Daily Large Trader Data Files," NBER Chapters, in: The Economics of Food Price Volatility National Bureau of Economic Research, Inc.
  7. Ing-Haw Cheng & Wei Xiong, 2013. "The Financialization of Commodity Markets," NBER Working Papers 19642, National Bureau of Economic Research, Inc.
  8. Adams, Zeno & Glück, Thorsten, 2013. "Financialization in Commodity Markets: Disentangling the Crisis from the Style Effect," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79949, Verein für Socialpolitik / German Economic Association.
  9. James D. Hamilton & Jing Cynthia Wu, 2014. "Effects of Index-Fund Investing on Commodity Futures Prices," NBER Working Papers 19892, National Bureau of Economic Research, Inc.
  10. Ing-Haw Cheng & Wei Xiong, 2013. "Why Do Hedgers Trade So Much?," NBER Working Papers 19670, National Bureau of Economic Research, Inc.
  11. Lehecka, Georg, 2013. "Have food and financial markets integrated? An empirical assessment on aggregate data," 53rd Annual Conference, Berlin, Germany, September 25-27, 2013 156108, German Association of Agricultural Economists (GEWISOLA).
  12. Michael Sockin & Wei Xiong, 2013. "Informational Frictions and Commodity Markets," NBER Working Papers 18906, National Bureau of Economic Research, Inc.

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