The links between international parity conditions and Granger causality: a study of exchange rates and prices |
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| Authors: | Bing-Xuan Lin Stephen D Smith |
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| Institution: | 1. College of Business Administration, University of Rhode Island , Finance Area, Kingston, RI 02881, Xinhua School of Finance and Insurance, Zhongnan University of Economics and Law, Wuhan, China;2. J. Mack Robinson College of Business, Georgia State University , Atlanta, GA 30303-3083 |
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| Abstract: | This article provides a simple equilibrium model of a futures market. Since the futures market is a zero sum game, some firms will, in equilibrium, end up being ‘speculators’ who bet against ‘hedgers’. We show it is firms that have high initial capital and/or poor production opportunities that are the most likely candidates to bet against the hedgers. In equilibrium, these groups earn a premium in order to provide this insurance so that speculating increases value. We also provide some results that imply an inverted U shaped relationship between trading volume and the level of futures prices. Empirical evidence from the S&P futures contract provides strong empirical support for this theoretical result. |
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| Keywords: | capacity utilization capacity output container shipping line |
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