Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/175080 
Year of Publication: 
2018
Series/Report no.: 
DIW Discussion Papers No. 1722
Publisher: 
Deutsches Institut für Wirtschaftsforschung (DIW), Berlin
Abstract: 
We study the state-dependent trading behavior of financial intermediaries in the oil futures market, using structural vector autoregressions with Markov switching in heteroskedasticity. We decompose changes in futures price volatility into changes in the slopes of traders' demand curves and in the variability of their demand shocks. We find that the downward-sloping demand curve of intermediaries steepens significantly during turbulent times. Moreover, the variance of intermediaries' own demand shocks doubles during these episodes. These findings suggest that the futures pricing of intermediaries is nonlinear and increases the hedging costs of producers and processors of oil when volatility is high.
Subjects: 
Commodities
Structural VAR
Financial Intermediaries
State-dependency
Asset Pricing
Markov Switching
JEL: 
C32
G12
G21
Q02
Document Type: 
Working Paper

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