Limits to arbitrage and hedging: Evidence from commodity markets

Journal of Financial Economics

Volumn 109, Issue 2, 2013, Pages 441-465

  Acharya, Viral V ^a,b,c   Lochstoer, Lars A ^d   Ramadorai, Tarun ^b,e,f  

^a NEW YORK UNIVERSITY   (United States)

^b CEPR   (United Kingdom)

^c NATIONAL BUREAU OF ECONOMIC RESEARCH   (United States)

^d The Sanford C Bernstein Co Center for Leadership and Ethics   (United States)

^e UNIVERSITY OF OXFORD   (United Kingdom)

^f UNIVERSITY OF OXFORD   (United Kingdom)

Author keywords

Commodity markets; Futures pricing; Hedging; Limits to arbitrage

Indexed keywords

EID: 84878982362     PISSN: 0304405X     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jfineco.2013.03.003     Document Type: Article

References (68)

1. Acharya V., Amihud Y., Litov L. Creditor rights and corporate risk-taking. Journal of Financial Economics 2011, 102:150-166.
2. Adrian T., Shin H. Liquidity and leverage. Journal of Financial Intermediation 2010, 19:418-437.
3. Altman E.I. Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance 1968, 23:589-609.
4. Amihud Y., Lev B. Risk reduction as a managerial motive for conglomerate mergers. Bell Journal of Economics 1981, 12:605-618.
5. Anderson W., Danthine J.-P. Hedging and joint production. theory and illustrations. Journal of Finance 1980, 35:487-498.
6. Anderson W., Danthine J.-P. Hedger diversity in futures markets. Economic Journal 1983, 93:370-389.
7. Ang A., Bekaert G. Stock return predictability. Is it there?. Review of Financial Studies 2007, 20:651-707.
8. Baird, D.G., Rasmussen, R.K., 2006. The prime directive. Unpublished working paper. University of Chicago and University of Southern California.
9. Berk J., Green R. Mutual fund flows and performance in rational markets. Journal of Political Economy 2004, 112:1269-1295.
10. Bessembinder H. Systematic risk, hedging pressure, and risk premiums in futures markets. Review of Financial Studies 1992, 5:637-667.
11. Bessembinder H., Chan H. Time-varying risk premiums and forecastable returns in futures markets. Journal of Financial Economics 1992, 32:169-193.
12. Bessembinder H., Lemmon M. Equilibrium pricing and optimal hedging in electricity forward markets. Journal of Finance 2002, 62:1347-1382.
13. Breeden, D., Viswanathan, S., 1990. Why do firms hedge? An asymmetric information model. Unpublished working paper. Duke University.
14. Brennan M. The supply of storage. American Economic Review 1958, 48:50-72.
15. Brennan M. The price of convenience and the valuation of commodity contingent claims. Stochastic Models and Option Values 1991, North-Holland, Amsterdam. D. Lund, B. Øksendal (Eds.).
16. Campbell J.Y., Thompson S. Predicting excess stock returns out of sample. Can anything beat the historical average?. Review of Financial Studies 2008, 21:1509-1531.
17. Carter C.A., Rausser G.C., Schmitz A. Efficient asset portfolios and the theory of normal backwardation. Journal of Political Economy 1983, 91:319-331.
18. Casassus J., Collin-Dufresne P. Stochastic convenience yields implied from commodity futures and interest rates. Journal of Finance 2005, 60:2283-2332.
19. Casassus, J., Collin-Dufresne, P., Routledge, B., 2008. Equilibrium commodity prices with irreversible investment and non-linear technologies, NBERWorking Paper No. 11864.
20. Chang C. Returns to speculators and the theory of normal backwardation. Journal of Finance 1985, 40:193-208.
21. Cheng, I., Kirilenko, A., Xiong, W., 2012. Convective risk flows in commodity futures markets. NBER Working Paper No. 17921.
22. Coles L., Daniel N., Naveen L. Managerial incentives and risk-taking. Journal of Financial Economics 2006, 79:431-468.
23. Coughlan A., Schmidt R. Executive compensation, management turnover, and firm performance. an empirical investigation. Journal of Accounting and Economics 1985, 7:43-66.
24. Danielsson, J., Shin, H.S., Zigrand, J.P., 2008. Endogenous risk and risk appetite. Unpublished working paper. London School of Economics and Princeton University.
25. Deaton A., Laroque G. On the behavior of commodity prices. Review of Economic Studies 1992, 59:1-23.
26. DeMarzo P., Duffie D. Corporate incentives for hedging and hedge accounting. Review of Financial Studies 1995, 8:743-771.
27. De Roon F., Nijman T., Veld C. Hedging pressure effects in futures markets. Journal of Finance 2000, 55:1437-1456.
28. Ederington L., Lee J.-H. Who trades futures and how. evidence from the heating oil futures market. Journal of Business 2002, 75:353-373.
29. Etula, E., 2009. Broker-dealer Risk Appetite and Commodity Returns. Staff Reports 406. Federal Reserve Bank of New York.
30. Fama E., French K. Commodity futures prices. some evidence on forecast power, premiums, and the theory of storage. Journal of Business 1987, 60:55-73.
31. Fama E., French K. Business conditions and expected returns on stocks and bonds. Journal of Financial Economics 1989, 25:23-49.
32. Fama E., French K. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 1993, 33:3-56.
33. Fehle F., Tsyplakov S. Dynamic risk management. theory and evidence. Journal of Financial Economics 2005, 78:3-47.
34. Froot K.A. The Financing of Catastrophe Risk 1999, University of Chicago Press.
35. Froot K.A., Scharfstein D.S., Stein J.C. Risk management. coordinating corporate investment and financing policies. Journal of Finance 1993, 58:1629-1658.
36. Gilson S.C. Management turnover and financial distress. Journal of Financial Economics 1989, 25:241-262.
37. Gormley, T., Matsa, D., 2008. Growing out of trouble? Legal liability and corporate responses to adversity. Unpublished working paper. Northwestern University.
38. Gorton, G., Hayashi, F., Rouwenhorst, K.G., 2007. The fundamentals of commodity futures returns. NBER Working Paper No. 13249.
39. Gromb D., Vayanos D. Equilibrium and welfare in markets with constrained arbitrageurs. Journal of Financial Economics 2002, 66:361-407.
40. Haushalter G.D. Financing policy basis, risk, and corporate hedging. evidence from oil and gas producers. Journal of Finance 2000, 55:107-152.
41. Haushalter G.D. Why hedge? Some evidence from oil and gas producers. Journal of Applied Corporate Finance 2001, 13:87-92.
42. He, Z., Xiong, W., 2008. Multi-market delegated asset management. Unpublished working paper. Princeton university.
43. Holmstrom B. Moral hazard and observability. Bell Journal of Economics 1979, 10:74-91.
44. Hong, H., Yogo, M., 2009. Digging into commodities. Unpublished working paper. Princeton University, University of Pennsylvania.
45. Hirshleifer D. Residual risk, trading costs, and commodity futures risk premiums. Review of Financial Studies 1988, 1:173-193.
46. Hirshleifer D. Futures trading, storage and the division of risk. a multiperiod analysis. Economic Journal 1989, 99:700-719.
47. Hirshleifer D. Hedging pressure and futures price movements in a general equilibrium model. Econometrica 1990, 58:411-428.
48. Jagannathan R. An investigation of commodity futures prices using the consumption-based intertemporal capital asset pricing model. Journal of Finance 1985, 40:175-191.
49. Jagannathan R., Wang Z. The conditional CAPM and the cross-section of expected returns. Journal of Finance 1996, 51:3-53.
50. Johnson, T.C., 2009. Commodity dependence and aggregate risk. Unpublished working paper. University of Illinois at Urbana-Champaign.
51. Kaldor N. Speculation and economic stability. Review of Economic Studies 1939, 7:1-27.
52. Keynes J.M. A Treatise on Money 1930, vol. 2. Macmillan, London.
53. Newey W., West K. A simple, positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 1987, 55:703-708.
54. Ng V., Pirrong S.C. Fundamentals and volatility. storage, spreads, and the dynamics of metals prices. Journal of Business 1994, 67:203-230.
55. Ozelge, S., 2007. The role of banks and private lenders in forced CEO turnover. Unpublished working paper. New York University.
56. Rogers, W.H., 1983. Analyzing complex survey data. Unpublished working paper. Rand Corporation, Santa Monica, CA.
57. Rogers, W.H., 1993. Regression standard errors in clustered samples. Stata Technical Bulletin Reprints STB-13:STB-18, pp. 88-94.
58. Routledge B., Seppi D., Spatt C. Equilibrium forward curves for commodities. Journal of Finance 2000, 55:1297-1338.
59. Schwartz E.S. The stochastic behavior of commodity prices. implications for valuation and hedging. Journal of Finance 1997, 52:923-973.
60. Shleifer A., Vishny R. The limits of arbitrage. Journal of Finance 1997, 52:35-55.
61. Smith C., Stulz R. The determinants of firms' hedging policies. Journal of Financial and Quantitative Analysis 1985, 20:391-405.
62. Stulz R. Optimal hedging policies. Journal of Financial and Quantitative Analysis 1984, 19:127-140.
63. Tang, K., Xiong, W., 2009. Index investing and the financialization of commodities. Unpublished working paper. Princeton University.
64. Tufano P. Who manages risk? An empirical examination of risk management practices in the gold mining industry. Journal of Finance 1996, 51:1097-1137.
65. Warner J., Watts R., Wruck K. Stock prices and top management changes. Journal of Financial Economics 1988, 20:461-492.
66. Weisbach M. Outside directors and CEO turnover. Journal of Financial Economics 1988, 20:431-460.
67. Working H. The theory of the price of storage. American Economic Review 1949, 39:1254-1262.
68. Zmijewski M.E. Methodological issues related to the estimation of financial distress prediction models. Journal of Accounting Research 1984, 22:59-82.