A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets |
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| Authors: | WENJIN KANG K. GEERT ROUWENHORST KE TANG |
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| Affiliation: | 1. Wenjin Kang is at the School of Finance, Shanghai University of Finance and Economics and the Shanghai Institute of International Finance and Economics. Geert Rouwenhorst is at the Yale School of Management and a partner at SummerHaven Investment Management. Ke Tang is at the Institute of Economics, School of Social Sciences at Tsinghua University. We have benefited from comments and suggestions from Hendrik Bessembinder;2. Geetesh Bhardwaj;3. Ing-haw Cheng;4. Gary Gorton;5. Ravi Jagannathan;6. Andrei Kirilenko;7. Pete Kyle;8. Peng Liu;9. Anna Pavlova;10. Neil Pearson;11. Tarun Ramadorai;12. Michel Robe;13. Matthew Spiegel;14. Marta Szymanowska;15. Dimitry Vayanos;16. two anonymous referees;17. the Editor (Stefan Nagel);18. and seminar participants at 2013 National Bureau of Economic Research (NBER) Meetings on the Economics of Commodity Markets, 2015 Western Finance Association Annual Conference, 2015 China International Conference in Finance, First Commodity Conference at Leibnitz University Hannover, United Nations Conference of Trade and Development (UNCTAD), Collegio Carlo Alberto, the CFTC, the Chinese University of Hong Kong, the City University of Hong Kong, CKGSB, Notre Dame, Hong Kong Polytech University, JP Morgan Commodity Centre at University of Colorado Denver, Luxembourg School of Finance, Pontifical Catholic University of Chile, Shanghai JiaoTong University, Shanghai University of Finance and Economics, SKKU Graduate School of Business (Seoul), University of Macau, Washington University St. Louis, and Yale University. Kang acknowledges research support from Shanghai University of Finance and Economics. Rouwenhorst acknowledges research support from the Yale School of Management. Tang acknowledges financial support from the National Natural Science Fundation of China (Grant No. 71973075) and National Science Fund for Distinguished Young Scholars of China (Grant No. 71325007). SummerHaven Investment Management invests in, among other things, commodity futures. The views expressed here are those of the authors and not necessarily those of any affiliated institution. |
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| Abstract: | This paper studies the dynamic interaction between the net positions of traders and risk premiums in commodity futures markets. Short-term position changes are driven mainly by the liquidity demands of noncommercial traders, while long-term variation is driven primarily by the hedging demands of commercial traders. These two components influence expected futures returns with opposite signs. The gains from providing liquidity by commercials largely offset the premium they pay for obtaining price insurance. |
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