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Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?

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  • William T. Gavin

    (Federal Reserve Bank of St. Louis)

  • Parantap Basu

    (University of Durham)

Abstract

In this paper we ask whether or not recent explosive growth in commodity derivative trading, both over the counter and on organized exchanges, represents a new us of these derivatives as an asset class to exploit a previously unrecognized hedge for business cycle risk as claimed by Gorton and Rowenhorst (2006) using data from 1959 through 2004. We use a Lucas tree model to show that the negative correlation reported by Gorton and Rowenhorst between commodity future returns and real output growth is likely an equilibrium condition and should not be evidence of an unexploited hedging opportunity.

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File URL: http://www.economicdynamics.org/meetpapers/2010/paper_1163.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1163.

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Date of creation: 2010
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Handle: RePEc:red:sed010:1163

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  1. Parantap Basu & William T. Gavin, 2011. "What explains the growth in commodity derivatives?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 37-48.
  2. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  3. Gary Gorton & K. Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," Yale School of Management Working Papers amz2619, Yale School of Management, revised 01 Mar 2005.
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Cited by:
  1. Chanont Banternghansa & Michael W. McCracken, 2010. "Real-time forecast averaging with ALFRED," Working Papers 2010-033, Federal Reserve Bank of St. Louis.
  2. Parantap Basu & William T. Gavin, 2011. "What explains the growth in commodity derivatives?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 37-48.

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