Commodity index trading and hedging costs

Brunetti, Celso; Reiffen, David

doi:10.1016/j.finmar.2014.08.001

Cited by 56 publications

(13 citation statements)

References 32 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Applying this idea to recent developments in commodity futures markets, Brunetti and Reiffen (2011), Acharya, Lochstoer, and Ramadorai (forthcoming), Cheng, Kirilenko, and Xiong (2012), and Hamilton and Wu (forthcoming) proposed that the growing volume of commodity index investors could produce hedging price pressure on the buy side, with Hamilton and Wu (forthcoming) finding that the average compensation to the long position in oil futures contracts has decreased but become substantially more volatile since 2005. Etula (forthcoming), Acharya, Lochstoer, and Ramadorai (forthcoming), Danielsson, Shin, andZigrand (2011), andCheng, Kirilenko, andXiong (2012) have stressed the role of limited working capital on the part of potential arbitrageurs as the key factor determining how much the futures price might deviate from the expected future spot price.…”

Section: Aboutmentioning

confidence: 99%

“…Bessembinder, Carrion, Tuttle, and Venkataraman (2012) found price effects that were usually reversed within 15 minutes, while Stoll and Whaley (2010) found little impact of the roll. Brunetti and Reiffen (2011) reported that higher index-fund positions raised the return on the second versus the near contract during the roll periods, while Aulerich, Irwin, and Garcia (2013) found the opposite effect.…”

mentioning

confidence: 98%

See 1 more Smart Citation

Effects of Index-Fund Investing on Commodity Futures Prices

Hamilton¹,

Wu²

2014

View full text Add to dashboard Cite

The last decade brought substantial increased participation in commodity markets by index funds that maintain long positions in the near futures contracts. Policy makers and academic studies have reached sharply different conclusions about the effects of these funds on commodity futures prices. This paper proposes a unifying framework for examining this question, noting that according to a simple model of futures arbitrage, if index-fund buying influences prices by changing the risk premium, then the notional positions of the index investors should help predict excess returns in these contracts.We find no evidence that the positions of traders in agricultural contracts identified by the CFTC as following an index strategy can help predict returns on the near futures contracts. We review evidence that these positions might help predict changes in oil futures prices, and find that while there is some support for this in the earlier data, this appears to be driven by some of the dramatic features of the 2007-2009 recession, with the relation breaking down out of sample.

show abstract

Section: Aboutmentioning

confidence: 99%

mentioning

confidence: 98%

Effects of Index-Fund Investing on Commodity Futures Prices

Hamilton¹,

Wu²

2014

View full text Add to dashboard Cite

show abstract

“…Similar ideas were also addressed from different perspectives in Acharya et al (2013) and Brunetti and Reiffen (2014), who explored trading in futures markets and hedging costs. They developed equilibrium models in which speculators are liquidity providers to hedgers.…”

Section: Previous Studiesmentioning

confidence: 98%

“…These constraints would lead to limits to arbitrage between equity and commodity markets, which in turn would affect commodity futures prices and reduce hedging activity. Brunetti and Reiffen (2014) investigated whether trading by commodity index traders would affect the cost of hedging in commodity futures markets. Although they do not account for transaction costs explicitly, they do incorporate the idea that the volatility of futures prices impact hedging costs.…”

Section: Previous Studiesmentioning

confidence: 99%

New Insights on Hedge Ratios in the Presence of Stochastic Transaction Costs

Andrade

Mattos

Lima

2018

Risks

View full text Add to dashboard Cite

The objective of this research is to evaluate the influence on hedging decisions of a realistic set of transaction costs which are largely stochastic. The stochastic nature of some transaction costs (such as margin calls) means that their exact value is unknown when the hedge is placed, since they depend on the trajectory of futures prices during the hedge. Results are consistent with previous studies in that the introduction of transaction costs tend to affect hedge ratios. However, as opposed to the traditional literature, the introduction of stochastic costs in futures hedging can either decrease or increase hedge ratios depending on how these costs are determined.

show abstract

“…Among all documented effects of the financialization developed in Section 2.2.3, the price pressure generated by CITs around the roll could affect KRT findings. In particular, Brunetti and Reiffen (2014) document that CITs act as insurance suppliers. They modify the risk‐sharing structure in the postfinancialization and potentially insurance prices.…”

Section: Literature Review and Hypotheses Developmentmentioning

confidence: 99%

A tale of two premiums revisited

Maréchal

2023

Journal of Futures Markets

View full text Add to dashboard Cite

This paper investigates the effect of the “financialization” of commodity markets in terms of pricing. I explore whether the emergence of commodity index traders (CITs) affects weekly returns and turnover during the roll periods. I split the sample (1994–2017) into prefinancialization (1994–2003) and postfinancialization (2004–2017). I directly test whether the CIT market share (CIT/open interest) contributes to commodity returns and whether risk adjustments (based on momentum, basis, basis‐momentum, open interest, crowding, and average factors) alter liquidity and insurance premiums documented in Kang, Rouwenhorst, and Tang. I also examine how the financialization affects liquidity and insurance premiums. Finally, since previous results are obtained with Fama–MacBeth regressions, I use an alternative method to test how liquidity and insurance premiums determine commodity returns.

show abstract

Commodity index trading and hedging costs

Cited by 56 publications

References 32 publications

Effects of Index-Fund Investing on Commodity Futures Prices

Effects of Index-Fund Investing on Commodity Futures Prices

New Insights on Hedge Ratios in the Presence of Stochastic Transaction Costs

A tale of two premiums revisited

Contact Info

Product

Resources

About