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A simple equilibrium model for a commodity market with spot trades and futures contracts

Villeneuve, Bertrand; Ekeland, Ivar; Lautier, Delphine (2013), A simple equilibrium model for a commodity market with spot trades and futures contracts, 30th International French Finance Association Conference, Lyon, FRANCE

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Type
Communication / Conférence
Date
2013
Conference title
30th International French Finance Association Conference
Conference city
Lyon
Conference country
FRANCE
Metadata
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Author(s)
Villeneuve, Bertrand cc
Ekeland, Ivar
Lautier, Delphine
Abstract (EN)
We propose a simple equilibrium model, where the physical and the derivativemarkets of the commodity interact. There are three types of agents: industrial pro-cessors, inventory holders and speculators. Only the two first of them operate in thephysical market. All of them, however, may initiate a position in the paper market,for hedging and/or speculation purposes. We give the necessary and sufficient con-ditions on the fundamentals of this economy for a rational expectations equilibriumto exist and we show that it is unique. This is the first contribution of the paper.Our model exhibits a surprising variety of behaviours at equilibrium, and our secondcontribution is that the paper offers a unique generalized framework for the analysisof price relationships. The model indeed allows for the generalization of hedgingpressure theory, and it shows how this theory is connected to the storage theory.Meanwhile, it allows to study simultaneously the two main economic functions ofderivative markets: hedging and price discovery. In its third contribution, throughthe distinction between the utility of speculation and that of hedging, the modelillustrates the interest of a derivatives market in terms of the welfare of the agents.
Subjects / Keywords
speculator; Derivative markets; inventory holders; Industrial processors; equilibrium
JEL
D40 - General
D81 - Criteria for Decision-Making under Risk and Uncertainty
D84 - Expectations; Speculations
G13 - Contingent Pricing; Futures Pricing
Q00 - General

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