When Do Futures Destabilize Spot Prices?

David M Newbery

International Economic Review, 1987, vol. 28, issue 2, 291-97

Abstract: Futures markets allow agents to shift price risk onto speculators and encourages them to take riskier decisions. Historically their main impact has been to encourage the storage of commodities, thus arbitraging prices over time and reducing price fluctuations. This paper presents a simple model in which opening futures markets in a nonstorable commodity encourages producers to choose riskier production techniques which destabilizes supply and hence the spot price. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1987
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