An Empirical Test of the Effect of Basis Risk on Cash Market Postitions
Janet S. Netz
Additional contact information
Janet S. Netz: Purdue University
Risk and Insurance from University Library of Munich, Germany
Traditional theory holds that hedgers use futures markets to reduce the amount of price risk they bear. In doing so, they trade price risk for basis risk, that is, unexpected movements in the difference between the spot and futures prices. Theoretical work has shown that the presence of basis risk reduces the position in the cash market as well as the relative use of futures as a hedging instrument. This paper empirically measures the effect of basis risk on the cash market position, using data on the storage of corn. Results show that basis risk statistically and economically significantly reduces the level of storage. The implications of basis risk on cash market positions extend beyond commodity storage to any hedging situation, including the use of currency futures to insure against exchange rate risk.
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpri:9501001
Access Statistics for this paper
More papers in Risk and Insurance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().