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http://hdl.handle.net/10419/60961
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| Title: | | Broker-dealer risk appetite and commodity returns  |
| Authors: | | Etula, Erkko |
| Issue Date: | | 2010 |
| Series/Report no.: | | Staff Report, Federal Reserve Bank of New York 406 |
| Abstract: | | This paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity markets. Commodity derivatives are the principal instrument used by producers and consumers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset-pricing model where producers and consumers of commodities share risk with broker-dealers who are subject to funding constraints. In equilibrium, the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. I estimate the model in the cross-section of commodities and find strong empirical support for its predictions. Fluctuations in risk-bearing capacity have particularly strong forecasting power for energy returns, both in sample and out of sample. |
| Subjects: | | Asset pricing financial intermediaries commodity prices futures markets risk appetite |
| JEL: | | G10 G12 G13 G24 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Staff Reports, Federal Reserve Bank of New York
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