Broker-dealer risk appetite and commodity returns

Erkko Etula

No 406, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity derivatives markets. Commodity derivatives are the principal instrument used by producers and purchasers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset pricing model where producers and purchasers of commodities share risk with broker-dealers who are subject to funding constraints. In equilibrium, the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. Empirical evidence from fourteen commodity markets lends substantial support to the model?s predictions. Fluctuations in risk-bearing capacity have particularly strong forecasting power for energy returns, both in sample and out of sample.

Keywords: asset pricing; financial intermediaries; commodity prices; futures markets; risk appetite (search for similar items in EconPapers)
JEL-codes: G10 G12 G13 G24 (search for similar items in EconPapers)
Date: 2009-11-01
New Economics Papers: this item is included in nep-ene and nep-rmg
Note: For a published version of this report, see Erkko Etula, "Broker-Dealer Risk Appetite and Commodity Returns," Journal of Financial Econometrics 11, no. 3 (June 2013): 486-521.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr406.html (text/html)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr406.pdf (application/pdf)

Related works:
Journal Article: Broker-Dealer Risk Appetite and Commodity Returns (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:406

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().