An Equilibrium Analysis of Hedging with Liquidity Constraints, Speculation, and Government Price Subsidy in a Commodity Market
We develop a simple commodity model to analyze (i) the effects of hedging with liquidity constraints, due to producers' inability to bear unlimited trading losses, (ii) the role of speculation in the process of risk allocation between consumers and producers, and (iii) the equilibrium implications of government price subsidies to the producers. We find that (1) liquidity constraints can cause futures prices to exhibit mean reversion, which then makes speculation profitable; (2) speculation tends to make futures price volatility an increasing function of futures price; and (3) government price subsidy, if actively hedged by the producers, serves to lower the futures risk premium and reduce futures volatility. Copyright The American Finance Association 1998.
Year of publication: |
1998
|
---|---|
Authors: | Zhou, Zhongquan |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 53.1998, 5, p. 1705-1736
|
Publisher: |
American Finance Association - AFA |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Dynamic portfolio insurance and equilibrium pricing
Zhou, Zhongquan, (1993)
-
OPTIMAL INVESTMENT STRATEGIES FOR CONTROLLING DRAWDOWNS
Grossman, Sanford J., (1993)
-
Equilibrium Analysis of Portfolio Insurance.
Grossman, Sanford J, (1996)
- More ...