Affiliation:
1. McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904
Abstract
I solve a dynamic equilibrium model of commodity spot and futures prices, incorporating an active futures market, heterogeneous risk-averse participants, and storage. When calibrated to data from the crude oil market, the model implies that financialization reduces the futures risk premium and increases correlation between futures open interest and the spot price level. However, there is no long-run increase in the mean spot price, and speculative storage generally attenuates financialization’s effect on spot price volatility. Therefore, financialization’s effect on spot price dynamics through storage arbitrage is likely modest, even if futures positions and risk premia are substantially altered. This paper was accepted by Gustavo Manso, finance.
Publisher
Institute for Operations Research and the Management Sciences (INFORMS)
Subject
Management Science and Operations Research,Strategy and Management
Cited by
24 articles.
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