Commodity Futures and the Limits to Arbitrage
Stuart School of Business research presentation by: Associate Professor of Finance Ricky Cooper
Commodity Futures and the Limits to Arbitrage
- Associate Professor of Finance Ricky Cooper
Abstract:
Previous research finds that systematic term premiums in commodity futures prices emerged when investors began to treat commodity futures as a unique asset class. This paper examines the source of these term premiums using a model of portfolio choice with limits to arbitrage that makes testable predictions concerning the impact of financialization on futures market term premiums. We test these hypotheses and present evidence to validate our theory. Our model suggests that systematic maturity premiums in the structure of futures prices are driven by institutional investors whose investments in commodity futures create a disequilibrium in futures prices that cannot be fully eliminated by arbitrage due to the risk involved in rolling futures positions.
All Illinois Tech faculty, students, and staff are invited to attend.
The Friday Research Presentations series showcases ongoing academic research projects conducted by Stuart School of Business faculty and students, as well as guest presentations by Stuart alumni, Illinois Tech colleagues, business professionals, and faculty from other leading business schools.