Commodity index trading and hedging costs
Celso Brunetti () and
Journal of Financial Markets, 2014, vol. 21, issue C, 153-180
Trading by commodity index traders (CITs) has become an important aspect of financial markets over the past 10 years. We develop an equilibrium model of trader behavior that relates uninformed CIT trading to futures prices. A key implication of the model is that CIT trading reduces the cost of hedging. We test the model using a unique non-public dataset that allows us to precisely identify trader positions. We find evidence, consistent with the model, that index traders have become an important supply of price risk insurance.
Keywords: Commodity index traders; Hedging; Limits to arbitrage (search for similar items in EconPapers)
JEL-codes: G13 C32 (search for similar items in EconPapers)
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Working Paper: Commodity index trading and hedging costs (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:21:y:2014:i:c:p:153-180
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