Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?
AbstractIn 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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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 1163.
Date of creation: 2010
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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