A simple equilibrium model for a commodity market with spot trades and futures contracts

Ivar Ekeland, Delphine Lautier and Bertrand Villeneuve
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Ivar Ekeland: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Delphine Lautier: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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Abstract: We propose a simple equilibrium model, where the physical and the derivative markets of the commodity interact. There are three types of agents: industrial pro- cessors, inventory holders and speculators. Only the two first of them operate in the physical market. All of them, however, may initiate a position in the paper market, for hedging and/or speculation purposes. We give the necessary and sufficient con- ditions on the fundamentals of this economy for a rational expectations equilibrium to exist and we show that it is unique. This is the first contribution of the paper. Our model exhibits a surprising variety of behaviours at equilibrium, and our second contribution is that the paper offers a unique generalized framework for the analysis of price relationships. The model indeed allows for the generalization of hedging pressure theory, and it shows how this theory is connected to the storage theory. Meanwhile, it allows to study simultaneously the two main economic functions of derivative markets: hedging and price discovery. In its third contribution, through the distinction between the utility of speculation and that of hedging, the model illustrates the interest of a derivatives market in terms of the welfare of the agents.

Keywords: Derivative markets; equilibrium; Industrial processors; inventory holders; speculator (search for similar items in EconPapers)
Date: 2013-05
Note: View the original document on HAL open archive server: https://hal.science/hal-01655807v1
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Citations: View citations in EconPapers (1)

Published in 30th International French Finance Association Conference, May 2013, Lyon, France. pp.33

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