An analysis of illiquidity in commodity markets

Sungjun Cho, Chanaka N. Ganepola, Ian Garrett

Research output: Contribution to journalArticle

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 languageEnglish
Pages (from-to)962-984
Number of pages23
JournalJournal of Futures Markets
Volume39
Issue number8
Early online date28 Mar 2019
DOIs
Publication statusPublished - 1 Aug 2019
Externally publishedYes

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

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  • Activities

    • 4 Participation in conference

    2018 European Conference - Finance Management Association

    Chanaka Ganepola (Speaker)
    13 Jun 201815 Jun 2018

    Activity: Participating in or organising an eventParticipation in conference

    2nd J.P. Morgan Center for Commodities annual international symposium,

    Chanaka Ganepola (Contributor), Ian Garrett (Speaker)
    13 Aug 201815 Aug 2018

    Activity: Participating in or organising an eventParticipation in conference

    2018 Commodity markets winter workshop

    Chanaka Ganepola (Speaker)
    22 Feb 201823 Feb 2018

    Activity: Participating in or organising an eventParticipation in conference

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