Futures Markets: A Consequences of Risk Aversion or Transactions Costs?
A two-period model of an industry of risk-neutral processors who have nonlinear production costs and who face transact ions costs in the spot and futures markets is put forth as a countere xample to the models of commodity markets in which processors' risk a version plays the major role. The model's equilibrium exhibits the sa lient endogenous features of actual commodity markets, namely, that t he futures price is below the current spot price, that processors hol d inventories despite this opportunity cost, that those holding inven tories are short in futures, and that processors as a group hold an u nbalanced, usually net short, position in the futures market. Copyright 1987 by University of Chicago Press.
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