Post by Sapphire Capital on Jul 12, 2008 0:06:42 GMT 4
Does Hedging Affect Commodity Prices? The Role of Producer Default Risk
VIRAL V. ACHARYA
London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR)
LARS A. LOCHSTOER
London Business School
TARUN RAMADORAI
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR) March 18, 2008
Abstract:
We develop a model of inventory management and hedging by commodity producers that face increasing cost of external finance in case they have to fund cash shortfalls for availing of their growth options. We hypothesize that the cost of external finance is increasing in producers' default risk. We then test the asset-pricing implications of the model for commodity spot and futures prices. We find that while high default risk is associated with high levels of hedging demand in futures markets and predicts higher excess returns on short-term futures contracts. Our results thus support the Keynesian hypothesis that hedging pressure affects commodity futures prices. However, default risk is not much related to contemporaneous convenience yield (measured as the basis between the shortest maturity futures contract and a longer-term one). The convenience yield is instead better explained by inventories of commodity producers.
full paper:
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1107949_code337715.pdf?abstractid=1105546&mirid=1
VIRAL V. ACHARYA
London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR)
LARS A. LOCHSTOER
London Business School
TARUN RAMADORAI
University of Oxford - Said Business School; Centre for Economic Policy Research (CEPR) March 18, 2008
Abstract:
We develop a model of inventory management and hedging by commodity producers that face increasing cost of external finance in case they have to fund cash shortfalls for availing of their growth options. We hypothesize that the cost of external finance is increasing in producers' default risk. We then test the asset-pricing implications of the model for commodity spot and futures prices. We find that while high default risk is associated with high levels of hedging demand in futures markets and predicts higher excess returns on short-term futures contracts. Our results thus support the Keynesian hypothesis that hedging pressure affects commodity futures prices. However, default risk is not much related to contemporaneous convenience yield (measured as the basis between the shortest maturity futures contract and a longer-term one). The convenience yield is instead better explained by inventories of commodity producers.
full paper:
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1107949_code337715.pdf?abstractid=1105546&mirid=1