Commodity index trading and hedging costs
Trading by commodity index traders (CITs) has become an important aspect of financial markets over the past 10 years. We develop an equilibrium model of trader behavior that relates uninformed CIT trading to futures prices. The model predicts that CIT trading reduces the cost of hedging. We test the model using a unique non-public dataset which precisely identifies trader positions. We find evidence, consistent with the model, that index traders have become an important supply of price risk insurance.
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- Viral V. Acharya & Lars A. Lochstoer & Tarun Ramadorai, 2011.
"Limits to Arbitrage and Hedging: Evidence from Commodity Markets,"
NBER Working Papers
16875, National Bureau of Economic Research, Inc.
- Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
- Acharya, Viral V & Lochstoer, Lars & Ramadorai, Tarun, 2009. "Limits to Arbitrage and Hedging: Evidence from Commodity Markets," CEPR Discussion Papers 7327, C.E.P.R. Discussion Papers.
- Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
- Erkko Etula, 2009. "Broker-dealer risk appetite and commodity returns," Staff Reports 406, Federal Reserve Bank of New York.
- Christian Francq & Lajos Horváth, 2011.
"Merits and Drawbacks of Variance Targeting in GARCH Models,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 9(4), pages 619-656.
- Christian FRANCQ & Lajos HORVATH & Jean-Michel ZAKOIAN, 2009. "Merits and Drawbacks of Variance Targeting in GARCH Models," Working Papers 2009-17, Centre de Recherche en Economie et Statistique.
- Francq, Christian & Horvath, Lajos & Zakoian, Jean-Michel, 2009. "Merits and drawbacks of variance targeting in GARCH models," MPRA Paper 15143, University Library of Munich, Germany.
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