The Futures Pricing Puzzle
AbstractThis paper models commodity futures in a rational expectations equilibrium specifically (i) incorporating the conflict of interests between Hedgers (Producers-Consumers) and Speculators and (ii) superimposing constraints to immunize the real sector of the economy from shocks of excessive futures contracting. We extend the framework of Newbery and Stiglitz (1981), Anderson and Danthine (1983) and Britto (1984) to attribute the conflicting and puzzling results in the empirical literature to the presence of multiple equilibria ranked in a pecking order of decreasing pareto-efficiency. Thus, we caution empirical researchers on making inferences on data embedded with moving equilibria, as it can render their analysis of asset pricing mechanism incomprehensible. Finally, we rationalize the imposition of position limits by policy makers to help steer the equilibria to pareto-inferior ones, which make the real sector of the economy more resilient to shocks from the financial sector
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 35.
Date of creation: 11 Nov 2005
Date of revision:
Contango; Expectations; Normal Backwardations;
Find related papers by JEL classification:
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-11-19 (All new papers)
- NEP-FIN-2005-11-19 (Finance)
- NEP-FMK-2005-11-19 (Financial Markets)
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