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Default Premiums in Commodity Markets: Theory and Evidence

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  • Bailey, Warren
  • Ng, Edward

Abstract

The authors model the effect on nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the "Hunt Brothers" episode. Changes in default premiums are measured and related to the sequence of events in the metals markets during this period. Results suggest that ex ante costs of nonperformance can be a significant, priced factor in commodity markets and that the arrival of new information is often associated with changes in these costs. The evidence has implications for both theoretical and empirical research on commodity markets. Copyright 1991 by American Finance Association.

Suggested Citation

  • Bailey, Warren & Ng, Edward, 1991. "Default Premiums in Commodity Markets: Theory and Evidence," Journal of Finance, American Finance Association, vol. 46(3), pages 1071-1093, July.
    • Handle: RePEc:bla:jfinan:v:46:y:1991:i:3:p:1071-93
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    Cited by:

    1. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    2. Richard Heaney, 1998. "A Test of the cost‐of‐carry relationship using the London Metal Exchange lead contract," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 18(2), pages 177-200, April.
    3. Chiu, Mei Choi & Wong, Hoi Ying & Zhao, Jing, 2015. "Commodity derivatives pricing with cointegration and stochastic covariances," European Journal of Operational Research, Elsevier, vol. 246(2), pages 476-486.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.

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