An equilibrium analysis of hedging with liquidity constraints, speculation, and government price subsidy in a commodity market

Article Abstract:

We develop a simple commodity model to analyze (i) the effects of hedging with liquidity constraints, due to producers' inability to bear unlimited trading losses, (ii) the role of speculation in the process of risk allocation between consumers and producers, and (iii) the equilibrium implications of government price subsidies to the producers. We find that (1) liquidity constraints can cause futures prices to exhibit mean reversion, which then makes speculation profitable; (2) speculation tends to make futures price volatility an increasing function of futures price; and (3) government price subsidy, if actively hedged by the producers, serves to lower the futures risk premium and reduce futures volatility. (Reprinted by permission of the publisher.)

Securities and Commodity Exchanges, Security and commodity exchanges, Commodity Exchanges, Speculation, Hedging (Finance), Liquidity (Finance), Subsidies, Equilibrium (Economics)

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Causal relations among stock returns, interest rates, real activity, and inflation

Article Abstract:

Using a multivariate vector-autoregression (VAR) approach, this paper investigates causal relations and dynamic interactions among asset returns, real activity, and inflation in the postwar United States. Major findings are (1) stock returns appear Granger-causally prior and help explain real activity, (2) with interest rates in the VAR, stock return explain little variation in inflation, although interest rates explain a substantial fraction of the variation in inflation, and (3) inflation explains little variation in real activity. These findings seem more compatible with Fama (1981) than with Geske and Roll (1983) or with Ram and Spencer (1983). Reprinted by permission of the publisher.

Usage, Inflation (Finance), Interest rates, Multivariate analysis, Return on investment, Rate of return, Inflation (Economics)

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