Who bets against hedgers and how much they trade? A theory and empirical tests
Document Type
Article
Date of Original Version
12-1-2009
Abstract
This article provides a simple equilibrium model of a futures market. Since the futures market is a zero sum game, some firms will, in equilibrium, end up being 'speculators' who bet against 'hedgers'. We show it is firms that have high initial capital and/or poor production opportunities that are the most likely candidates to bet against the hedgers. In equilibrium, these groups earn a premium in order to provide this insurance so that speculating increases value. We also provide some results that imply an inverted U shaped relationship between trading volume and the level of futures prices. Empirical evidence from the S&P futures contract provides strong empirical support for this theoretical result. © 2009 Taylor & Francis.
Publication Title, e.g., Journal
Applied Economics
Volume
41
Issue
27
Citation/Publisher Attribution
Lin, Bing Xuan, Chen Miao Lin, and Stephen D. Smith. "Who bets against hedgers and how much they trade? A theory and empirical tests." Applied Economics 41, 27 (2009): 3491-3497. doi: 10.1080/00036840701493766.
