NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Limits to Arbitrage and Hedging: Evidence from Commodity Markets

Viral V. Acharya, Lars A. Lochstoer, Tarun Ramadorai

NBER Working Paper No. 16875
Issued in March 2011
NBER Program(s):   AP   CF

Motivated by the literature on limits-to-arbitrage, we build an equilibrium model of commodity markets in which speculators are capital constrained, and commodity producers have hedging demands for commodity futures. Increases (decreases) in producers' hedging demand (speculators' risk-capacity) increase hedging costs via price-pressure on futures, reduce producers' inventory holdings, and thus spot prices. Consistent with our model, producers' default risk forecasts futures returns, spot prices, and inventories in oil and gas market data from 1980-2006, and the component of the commodity futures risk premium associated with producer hedging demand rises when speculative activity reduces. We conclude that limits to financial arbitrage generate limits to hedging by producers, and affect both asset and goods prices.

download in pdf format
   (817 K)

email paper

This paper is available as PDF (817 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16875

“Limits to Arbitrage and Hedging: Evidence from Commodity Markets” with Lars Lochstoer and Tarun Ramadorai, forthcoming, Journal of Financial Economics.

Users who downloaded this paper also downloaded these:
Cheng, Kirilenko, and Xiong w17921 Convective Risk Flows in Commodity Futures Markets
Tang and Xiong w16385 Index Investment and Financialization of Commodities
Gromb and Vayanos w15821 Limits of Arbitrage: The State of the Theory
Gorton, Hayashi, and Rouwenhorst w13249 The Fundamentals of Commodity Futures Returns
Gorton and Rouwenhorst w10595 Facts and Fantasies about Commodity Futures
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us