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Commodity Futures Contract Viability: A Multidisciplinary Approach

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Author Info
Joost M.E. Pennings (University of Illinois at Urbana-Champaign)
Raymond M. Leuthold (University of Illinois at Urbana-Champaign)

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Abstract

We propose a development process of commodity futures contracts in which the decisions and wishes of potential customers are investigated simultaneously with the necessary technical properties that need to be met for trading to take place. Within this framework the relationship between trading volume and hedging effectiveness is examined taking both basis risk and market depth risk into account, and the relationship between owner-manager's characteristics and the probability of using futures is examined, taking latent variables and the heterogeneity of owner-managers into account. The relationships are tested on a set of data gathered in a stratified sample of 440 owner-managers by means of computer-assisted personal interviews and on transaction-specific futures data. Structural equation models and multiple regression models are used to validate the relationships. The hedging effectiveness and the variables that play a role in the owner-manager's use of futures are related to the tools of the exchange.

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File URL: http://129.3.20.41/eps/fin/papers/9905/9905002.pdf
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Publisher Info
Paper provided by EconWPA in its series Finance with number 9905002.

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Length: 40 pages
Date of creation: 01 May 1999
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Handle: RePEc:wpa:wuwpfi:9905002

Note: Type of Document - PDF; prepared on IBM PC ; pages: 40 ; figures: included. Office for Futures and Options Research (OFOR) at the University of Illinois at Urbana-Champaign. Working Paper 99-02. For a complete list of OFOR working papers see http://w3.ag.uiuc.edu/ACE/ofor
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Related research
Keywords: Futures Contracts Design; Multidisciplinarity; Hedging Effectiveness; Choice Behavior; Measurement Error; Segments; Futures Exchange Toolbox;

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Find related papers by JEL classification:
G - Financial Economics

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Anderson, Ronald W & Danthine, Jean-Pierre, 1980. " Hedging and Joint Production: Theory and Illustrations," Journal of Finance, American Finance Association, vol. 35(2), pages 487-98, May. [Downloadable!] (restricted)
  2. Thaler, Richard H, 1997. "Irving Fisher: Modern Behavioral Economist," American Economic Review, American Economic Association, vol. 87(2), pages 439-41, May. [Downloadable!] (restricted)
  3. Eliashberg, Jehoshua. & Hauser, John R., 1983. "A measurement error approach for modeling consumer risk preference," Working papers 1439-83., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  4. Tashjian, Elizabeth, 1995. "Optimal futures contract design," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(2), pages 153-162. [Downloadable!] (restricted)
  5. Sik-Yum Lee & S. Wang, 1996. "Sensitivity analysis of structural equation models," Psychometrika, Springer, vol. 61(1), pages 93-108, March. [Downloadable!] (restricted)
  6. Smith, Clifford W. & Stulz, Ren? M., 1985. "The Determinants of Firms' Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 391-405, December. [Downloadable!]
  7. Joost M. E. Pennings & W. Erno Kuiper & Frenkel ter Hofstede & Matthew T. G. Meulenberg, 1998. "The price path due to order imbalances: evidence from the Amsterdam Agricultural Futures Exchange," European Financial Management, Blackwell Publishing Ltd, vol. 4(1), pages 47-64. [Downloadable!] (restricted)
  8. Howard, Charles T. & D'Antonio, Louis J., 1984. "A Risk-Return Measure of Hedging Effectiveness," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(01), pages 101-112, March. [Downloadable!]
  9. Yiu-Fai Yung, 1997. "Finite mixtures in confirmatory factor-analysis models," Psychometrika, Springer, vol. 62(3), pages 297-330, September. [Downloadable!] (restricted)
  10. Jennifer Lynch Koski & Jeffrey Pontiff, 1999. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 54(2), pages 791-816, 04. [Downloadable!] (restricted)
    Other versions:
  11. Mian, Shehzad L., 1996. "Evidence on Corporate Hedging Policy," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(03), pages 419-439, September. [Downloadable!]
  12. Catherine Schrand & Haluk Unal, 1998. "Hedging and Coordinated Risk Management: Evidence from Thrift Conversions," Journal of Finance, American Finance Association, vol. 53(3), pages 979-1013, 06. [Downloadable!] (restricted)
  13. Bruce N. Lehmann and David M. Modest., 1994. "Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View," Research Program in Finance Working Papers RPF-234, University of California at Berkeley.
  14. David Carter & Joseph Sinkey, 1998. "The Use of Interest Rate Derivatives by End-users: The Case of Large Community Banks," Journal of Financial Services Research, Springer, vol. 14(1), pages 17-34, July. [Downloadable!] (restricted)
  15. Holthausen, Duncan M, 1979. "Hedging and the Competitive Firm under Price Uncertainty," American Economic Review, American Economic Association, vol. 69(5), pages 989-95, December. [Downloadable!] (restricted)
  16. Johnston, Elizabeth Tashjian & McConnell, John J, 1989. "Requiem for a Market: An Analysis of the Rise and Fall of a Financial Futures Contract," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 2(1), pages 1-23. [Downloadable!] (restricted)
  17. Ederington, Louis H, 1979. "The Hedging Performance of the New Futures Markets," Journal of Finance, American Finance Association, vol. 34(1), pages 157-70, March. [Downloadable!] (restricted)
  18. Nance, Deana R & Smith, Clifford W, Jr & Smithson, Charles W, 1993. " On the Determinants of Corporate Hedging," Journal of Finance, American Finance Association, vol. 48(1), pages 267-84, March. [Downloadable!] (restricted)
  19. Lehmann, Bruce N & Modest, David M, 1994. " Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View," Journal of Finance, American Finance Association, vol. 49(3), pages 951-84, July. [Downloadable!] (restricted)
  20. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February. [Downloadable!] (restricted)
  21. Paroush, Jacob & Wolf, Avner, 1992. "The Derived Demand with Hedging Cost Uncertainty in the Futures Markets," Economic Journal, Royal Economic Society, vol. 102(413), pages 831-44, July. [Downloadable!] (restricted)
  22. Cuny, Charles J, 1993. "The Role of Liquidity in Futures Market Innovations," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(1), pages 57-78. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Parcell, Joe L., 2002. "Emerging Ip Markets: The Tokyo Grain Exchange Non-Gmo Soybean Contract," Working Papers 26038, University of Missouri Columbia, Department of Agricultural Economics. [Downloadable!]
  2. Parcell, Joe L., 2002. "Emerging Ip Markets: The Tokyo Grain Exchange Non-Gmo Soybean Contract," 2002 Conference, April 22-23, 2002, St. Louis, Missouri 19058, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
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