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

Fingerprint

Commodities
Commodity markets
Speculators
Illiquidity
Premium
Liquidity
Insurance
Insurance premium
Turnover
Liquidity premium

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

Cite this

An analysis of illiquidity in commodity markets. / Cho, Sungjun; Ganepola, Chanaka N.; Garrett, Ian.

In: Journal of Futures Markets, Vol. 39, No. 8, 01.08.2019, p. 962-984.

Research output: Contribution to journalArticle

Cho, Sungjun ; Ganepola, Chanaka N. ; Garrett, Ian. / An analysis of illiquidity in commodity markets. In: Journal of Futures Markets. 2019 ; Vol. 39, No. 8. pp. 962-984.
@article{c00a775bce3d495aa5e49d2700848699,
title = "An analysis of illiquidity in commodity markets",
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.",
keywords = "hedgers, insurance, liquidity, premia, speculators",
author = "Sungjun Cho and Ganepola, {Chanaka N.} and Ian Garrett",
year = "2019",
month = "8",
day = "1",
doi = "10.1002/fut.22007",
language = "English",
volume = "39",
pages = "962--984",
journal = "The Journal of Futures Markets",
issn = "0270-7314",
publisher = "Wiley",
number = "8",

}

TY - JOUR

T1 - An analysis of illiquidity in commodity markets

AU - Cho, Sungjun

AU - Ganepola, Chanaka N.

AU - Garrett, Ian

PY - 2019/8/1

Y1 - 2019/8/1

N2 - 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.

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.

KW - hedgers

KW - insurance

KW - liquidity

KW - premia

KW - speculators

UR - http://www.scopus.com/inward/record.url?scp=85063613970&partnerID=8YFLogxK

U2 - 10.1002/fut.22007

DO - 10.1002/fut.22007

M3 - Article

VL - 39

SP - 962

EP - 984

JO - The Journal of Futures Markets

JF - The Journal of Futures Markets

SN - 0270-7314

IS - 8

ER -