The Futures Price of A Commodity and FIxed Supply

Rafael Eldor and David Pines

No 275400, Foerder Institute for Economic Research Working Papers from Tel-Aviv University > Foerder Institute for Economic Research

Abstract: This note shows that in a general equilibrium model of homogeneous population with production risk, the futures price of a commodity which is in fixed supply is always below the expected futures spot price (e.g. normal backwardation). It also shows that the difference between the futures price and the expected spot price increases as the representative individual's risk aversion rises. An important application of this model is to the housing market since houses are in fixed supply in the short run and buying a house is like holding along position in a forward contract. Therefore, if population is homogeneous houses are not a good consumption hedge and housing prices are below expected rental prices.

Keywords: Demand and Price Analysis; Financial Economics (search for similar items in EconPapers)
Pages: 14
Date: 1986-01
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Persistent link: https://EconPapers.repec.org/RePEc:ags:isfiwp:275400

DOI: 10.22004/ag.econ.275400

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