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Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?

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  • Parantap Basu
  • William T. Gavin

Abstract

The negative correlation between equity and commodity futures returns is widely perceived by investors as an unexploited hedging opportunity. A Lucas (1982) asset-pricing model is adapted to analyze the fundamentals driving equity and commodity futures returns. Using the model we argue that such a negative correlation could arise as an equilibrium relationship which reflects traders' perceptions about the shocks driving the fundamentals such as energy and consumables, and does not necessarily indicate any hedging opportunity.

Suggested Citation

  • Parantap Basu & William T. Gavin, 2011. "Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?," Working Papers 2011-005, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:101696
    DOI: 10.20955/wp.2011.005
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    Cited by:

    1. Haarstad, Aleksander H. & Lavrutich, Maria & Strypet, Kristian & Strøm, Eivind, 2022. "Multi-commodity price risk hedging in the Atlantic salmon farming industry," Journal of Commodity Markets, Elsevier, vol. 25(C).
    2. Chanont Banternghansa & Michael W. McCracken, 2011. "Real-time forecast averaging with ALFRED," Review, Federal Reserve Bank of St. Louis, vol. 93(Jan), pages 49-66.
    3. Parantap Basu & William T. Gavin, 2011. "What explains the growth in commodity derivatives?," Review, Federal Reserve Bank of St. Louis, vol. 93(Jan), pages 37-48.

    More about this item

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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