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Risk Premiums and the Storage of Agricultural Commodities

  • Lin, Hua

    (U of Wisconsin)

  • Fortenbery, T. Randall

The existence of a commodity market risk premium has attracted the interest of researchers for several decades. Most attempts to measure risk premiums have been focused on futures markets. However, if the risk premium is a payment made by hedgers (as suggested by Keynes) to reduce their risk profile, then the risk being reduced originates in the cash market. This suggests that the risk premium may also originate in the cash market. As such, the search for a risk premium should focus on the cash market, and, given Working's Supply of Storage Curve, should be measured as a function of stored inventory. This paper develops an expected utility based model that separates the risk premium from other storage incentives, and illustrates the role of the cash market risk premium on the storage decisions of two different market agents.

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File URL: http://www.aae.wisc.edu/pubs/sps/pdf/stpap504.pdf
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Paper provided by University of Wisconsin, Agricultural and Applied Economics in its series Staff Paper Series with number 504.

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Date of creation: Dec 2006
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Handle: RePEc:ecl:wisagr:504
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  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  2. Carter, Colin A. & Rausser, Gordon C. & Schmitz, Andrew, 1982. "Efficient asset portfolios and the theory of normal backwardation," CUDARE Working Paper Series 133R, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  3. Bruce Bjornson & Colin A. Carter, 1997. "New Evidence on Agricultural Commodity Return Performance under Time-Varying Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 918-930.
  4. Bessembinder, Hendrik, 1992. "Systematic Risk, Hedging Pressure, and Risk Premiums in Futures Markets," Review of Financial Studies, Society for Financial Studies, vol. 5(4), pages 637-67.
  5. Dusak, Katherine, 1973. "Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1387-1406, Nov.-Dec..
  6. T. Randall Fortenbery & Hector O. Zapata, 1997. "An evaluation of price linkages between futures and cash markets for cheddar cheese," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 17(3), pages 279-301, 05.
  7. Joost M. E. Pennings & Ale Smidts, 2003. "The Shape of Utility Functions and Organizational Behavior," Management Science, INFORMS, vol. 49(9), pages 1251-1263, September.
  8. Jean-Paul Chavas & Paula M. Despins & T. Randy Fortenbery, 2000. "Inventory Dynamics under Transaction Costs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(2), pages 260-273.
  9. Lester G. Telser, 1958. "Futures Trading and the Storage of Cotton and Wheat," Journal of Political Economy, University of Chicago Press, vol. 66, pages 233.
  10. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
  11. Chavas, Jean-Paul, 1988. "On competitive speculation under uncertainty: An alternative view of the inverse-carrying charge," Journal of Economics and Business, Elsevier, vol. 40(2), pages 117-128, May.
  12. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  13. Chavas, Jean-Paul & Holt, Matthew T, 1996. "Economic Behavior under Uncertainty: A Joint Analysis of Risk Preferences and Technology," The Review of Economics and Statistics, MIT Press, vol. 78(2), pages 329-35, May.
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