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Convective Risk Flows in Commodity Futures Markets

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  • Ing-Haw Cheng
  • Andrei Kirilenko
  • Wei Xiong

Abstract

This paper analyzes the joint responses of commodity futures prices and traders' futures positions to changes in the VIX before and after the recent financial crisis. We find that while financial traders accommodate the needs of commercial hedgers in normal times, in times of distress, financial traders reduce their net long positions in response to an increase in the VIX causing the risk to flow to commercial hedgers. By exploiting a cross-section of traders, we provide micro-level evidence for a convective flow of risk from distressed financial traders to the ultimate producers of commodities in the real economy.

Suggested Citation

  • Ing-Haw Cheng & Andrei Kirilenko & Wei Xiong, 2012. "Convective Risk Flows in Commodity Futures Markets," NBER Working Papers 17921, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:17921
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    References listed on IDEAS

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    1. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
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    6. Adrian, Tobias & Shin, Hyun Song, 2010. "Liquidity and leverage," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 418-437, July.
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    14. 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 637-667.
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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