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Broker-Dealer Risk Appetite and Commodity Returns

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  • Erkko Etula

Abstract

This article shows that the risk-bearing capacity of U.S. securities broker-dealers is an important determinant of risk premia in commodity derivatives markets where broker-dealers serve as counterparties to producers and consumers seeking to hedge commodity price risk. I capture the limits of arbitrage that govern these transactions within a simple asset pricing model, which predicts that the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. This prediction receives strong empirical support in the data. Fluctuations in broker-dealer risk-bearing capacity have particularly strong forecasting power for energy returns, both in-sample and out-of-sample. Copyright The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.

Suggested Citation

  • Erkko Etula, 2013. "Broker-Dealer Risk Appetite and Commodity Returns," Journal of Financial Econometrics, Oxford University Press, vol. 11(3), pages 486-521, June.
    • Handle: RePEc:oup:jfinec:v:11:y:2013:i:3:p:486-521
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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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