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The simple analytics of commodity futures markets: do they stabilize prices? Do they raise welfare?

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  • V. V. Chari
  • Ravi Jagannathan

Abstract

This paper uses a simple, graphical approach to analyze what happens to commodity prices and economic welfare when futures markets are introduced into an economy. It concludes that these markets do not necessarily make prices more or less stable. It also concludes that, contrary to common belief, whatever happens to commodity prices is not necessarily related to what happens to the economic welfare of market participants: even when futures markets reduce the volatility of prices, some people can be made worse off. These conclusions come from a series of models that differ in their assumptions about the primary function of futures markets, the structure of the industries involved, and the tastes and technologies of the market participants.

Suggested Citation

  • V. V. Chari & Ravi Jagannathan, 1990. "The simple analytics of commodity futures markets: do they stabilize prices? Do they raise welfare?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 12-24.
  • Handle: RePEc:fip:fedmqr:y:1990:i:sum:p:12-24:n:v.4no.3
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    References listed on IDEAS

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    1. Hart, Oliver D & Kreps, David M, 1986. "Price Destabilizing Speculation," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 927-952, October.
    2. Turnovsky, Stephen J & Campbell, Robert B, 1985. "The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 277-303, June.
    3. Masahiro Kawai, 1983. "Spot and Futures Prices of Nonstorable Commodities Under Rational Expectations," The Quarterly Journal of Economics, Oxford University Press, vol. 98(2), pages 235-254.
    4. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-1387, September.
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    Cited by:

    1. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.
    2. Donald Lien & Mei Zhang, 2008. "A Survey of Emerging Derivatives Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(2), pages 39-69, March.

    More about this item

    Keywords

    Futures ; Commercial products;

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