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An analysis of illiquidity in commodity markets

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  • Sungjun Cho
  • Chanaka N. Ganepola
  • Ian Garrett

Abstract

We examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.

Suggested Citation

  • Sungjun Cho & Chanaka N. Ganepola & Ian Garrett, 2019. "An analysis of illiquidity in commodity markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(8), pages 962-984, August.
    • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:8:p:962-984
    DOI: 10.1002/fut.22007
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