Title

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

Applied Economics

Volume

41

Issue

27

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