An analysis of illiquidity in commodity markets

Sungjun Cho; Chanaka N. Ganepola; Ian Garrett

doi:10.1002/fut.22007

An analysis of illiquidity in commodity markets

Sungjun Cho, Chanaka N. Ganepola, Ian Garrett

Research output: Contribution to journal › Article › peer-review

8 Citations (Scopus)

Abstract

We examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.

Original language	English
Pages (from-to)	962-984
Number of pages	23
Journal	Journal of Futures Markets
Volume	39
Issue number	8
Early online date	28 Mar 2019
DOIs	https://doi.org/10.1002/fut.22007
Publication status	Published - 1 Aug 2019
Externally published	Yes

Funder

Central Bank of Sri Lanka

Keywords

hedgers
insurance
liquidity
premia
speculators

ASJC Scopus subject areas

Accounting
Business, Management and Accounting(all)
Finance
Economics and Econometrics

Access to Document

10.1002/fut.22007

Cite this

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abstract = "We examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.",

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AB - We examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.

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KW - insurance

KW - liquidity

KW - premia

KW - speculators

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ER -

An analysis of illiquidity in commodity markets

Abstract

Funder

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Commodity and Energy Markets annual meeting 2018

2018 European Conference - Finance Management Association

2018 Commodity markets winter workshop

Cite this

An analysis of illiquidity in commodity markets

Abstract

Funder

Keywords

ASJC Scopus subject areas

Access to Document

Other files and links

Fingerprint

Activities

Commodity and Energy Markets annual meeting 2018

2018 European Conference - Finance Management Association

2018 Commodity markets winter workshop

Cite this