Negative Correlation between Stock and Futures Returns: An Unexploited Hedging Opportunity?

In this paper we ask whether or not recent explosive growth in commodity derivative trading, both over the counter and on organized exchanges, represents a new us of these derivatives as an asset class to exploit a previously unrecognized hedge for business cycle risk as claimed by Gorton and Rowenhorst (2006) using data from 1959 through 2004. We use a Lucas tree model to show that the negative correlation reported by Gorton and Rowenhorst between commodity future returns and real output growth is likely an equilibrium condition and should not be evidence of an unexploited hedging opportunity.