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By Dempster, Michael Alan Howarth

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Extra info for Commodities

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J. Finance, 2000, 55, 1297–1338. , Proof that properly anticipated prices fluctuate randomly. Industr. Manage. , 1965, 6, 41–43. , The stochastic behaviour of commodity prices: Implications for valuation and hedging. J. Finance, 1997, 52, 923–973. , Time-varying long-run mean of commodity prices and the modelling of futures term structures. Quant. Finance, 2012, 12, 781–790. Tang, K. , Index investment and financialization of commodities. Financ. Analyst. , 2012, 68, 54–74. Till, H. , Intelligent Commodity Investing: New Strategies and Practical Insights for Informed Decision Making, 2007 (Risk Books: London).

The hypothesis breaks down, however, if we add an additional demand for ‘paper’ barrels from passive investors. These financial investors have outpaced their original function of providing capital to balance the gaps between producers and consumers. In fact, capital provided by financial investors began to exceed the entire hedging imbalance it was supposed to stabilise around 2007. The net hedging pressure switched from negative to positive, from net sellers to net buyers. With forward prices now systematically exceeding spot prices, any forward seller is now able to collect the new risk premium which is paid by investors.

In order to better understand the role of investors, Commodity Futures Trading Commission (CFTC) data aggregated since December 2007 on swap index positions was used. Prior to December 2007, the data was calculated using proprietary models and various interviews with market participants and index providers. S. refined products were also included as they are typically converted to crude oil by refinery hedgers. 1, confirm Keynes’ hypothesis that the majority of hedging volumes are executed by producers which results in negative hedging pressure.

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