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Broker-Dealer Risk Appetite and Commodity Returns

  • Erkko Etula

This article shows that the risk-bearing capacity of U.S. securities broker-dealers is an important determinant of risk premia in commodity derivatives markets where broker-dealers serve as counterparties to producers and consumers seeking to hedge commodity price risk. I capture the limits of arbitrage that govern these transactions within a simple asset pricing model, which predicts that the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. This prediction receives strong empirical support in the data. Fluctuations in broker-dealer risk-bearing capacity have particularly strong forecasting power for energy returns, both in-sample and out-of-sample. Copyright The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

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File URL: http://hdl.handle.net/10.1093/jjfinec/nbs024
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Article provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.

Volume (Year): 11 (2013)
Issue (Month): 3 (June)
Pages: 486-521

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Handle: RePEc:oup:jfinec:v:11:y:2013:i:3:p:486-521
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