Broker-Dealer Risk Appetite and Commodity Returns

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. AbstractThis paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity markets. Commodity derivatives are the principal instrument used by producers and consumers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset-pricing model where producers and consumers of commodities share risk with broker-dealers who are subject to funding constraints. In equilibrium, the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. I estimate the model in the cross-section of commodities and find strong empirical support for its predictions. Fluctuations in riskbearing capacity have particularly strong forecasting power for energy returns, both in sample and out of sample.

Advances in the Commodity Futures Literature: A Review

“…The first category includes articles that employ models like the CAPM and the consumption CAPM (CCAPM) that are expected to price any asset in the case where markets are integrated (macro-models, e.g., Dusak [1973], Bodie and Rosansky [1980], and Breeden [1980]). Finally, Etula [2010] finds that the leverage of broker dealers, the main players in the overthe-counter commodity derivatives markets, predicts the returns of certain commodity futures; interestingly, Adrian et al [2012] find that the leverage of broker dealers prices the cross-section of equities. There are also some studies that examine whether equity-motivated tradable factors like Fama-French [1993] affect the individual commodity futures returns within a time series setting; evidence shows that they do not (Erb and Harvey [2006]).…”

Using Market Expectations to Test for Speculative Bubbles in the Crude Oil Market

“…The authors show that risk premia are economically significant and exhibit substantial fluctuations over time. The presence of time-varying risk premia in oil markets is also supported by the large number of studies that find predictability in oil futures returns by using various financial and macroeconomic variables (De Roon, Nijman, and Veld 2000, Pagano and Pisani 2009, Etula 2013.…”

Economic uncertainty, trading activity, and commodity futures volatility

“…They find that when speculator activity is constrained or reduced, the impact of hedging demand increases, that is, unconstrained speculator activity will assist the absorption of producer demand shocks. Etula () also finds that the risk‐bearing capacity of broker‐dealers is predictive of commodity risk premia.…”