We show that a standard production economy model where consumers have Epstein-Zin preferences can jointly explain the low volatility of consumption growth and a high market price of risk with a low coe¢ cient of relative risk aversion (5). Endogenous consumption smoothing increases the price of risk in this economy as it induces highly persistent time-variation in expected aggregate consumption growth (long-run risk), even though technology follows a random walk. As is usual in production economy models, the volatility of equity returns is quite low. We propose an extension where we calibrate the wage process to the data and show that this brings the equity volatility, and thus the equity premium, much closer to historical values. The model identi…es an observable proxy for otherwise hard to measure expected consumption growth. Using this proxy, we test and …nd support for key predictions of our model in the time-series of consumption growth and the cross-section of stock returns.

Motivated by the literature on limits-to-arbitrage, we build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases (decreases) in producers' hedging demand (speculators'risk-capacity) increase hedging costs via price-pressure on futures, reduce producers'inventory holdings, and thus spot prices. Consistent with our model, producers'default risk forecasts futures returns, spot prices, and inventories in oil and gas market data from 1980-2006, and the component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to …nancial arbitrage generate limits to hedging by producers, and a¤ect both asset and goods prices. risk-capacity) increase hedging costs via price-pressure on futures, reduce producers' inventory holdings, and thus spot prices. Consistent with our model, producers'default risk forecasts futures returns, spot prices, and inventories in oil and gas market data from 1980-2006, and the component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to …nancial arbitrage generate limits to hedging by producers, and a¤ect both asset and goods prices.

Motivated by the literature on limits-to-arbitrage, we build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases (decreases) in producers' hedging demand (speculators'risk-capacity) increase hedging costs via price-pressure on futures, reduce producers'inventory holdings, and thus spot prices. Consistent with our model, producers'default risk forecasts futures returns, spot prices, and inventories in oil and gas market data from 1980-2006, and the component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to …nancial arbitrage generate limits to hedging by producers, and a¤ect both asset and goods prices. risk-capacity) increase hedging costs via price-pressure on futures, reduce producers' inventory holdings, and thus spot prices. Consistent with our model, producers'default risk forecasts futures returns, spot prices, and inventories in oil and gas market data from 1980-2006, and the component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to …nancial arbitrage generate limits to hedging by producers, and a¤ect both asset and goods prices.