Commodity index trading and hedging costs

Celso Brunetti and David Reiffen

Journal of Financial Markets, 2014, vol. 21, issue C, 153-180

Abstract: 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: C32 G13 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (43)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386418114000640
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Commodity index trading and hedging costs (2011)
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:eee:finmar:v:21:y:2014:i:c:p:153-180

DOI: 10.1016/j.finmar.2014.08.001

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().