The thesis consists basically of two parts. The first part deals with speculators in commodity markets. In particular, we are interested in the role of speculators in stabilizing or destabilizing market price. The second part takes up hedgers in commodity futures markets. Here, we are concerned with the asymmetries between short and long hedgers. Specifically, we study whether or not the asymmetries discussed in the literature will lead to a backwardation equilibrium in futures markets.
The two approaches differ in the way speculators are treated in the framework as market participants. In the literature dealing with speculators and stabilization, the non-speculators are inactive; their only role is to provide an (exogenous) non-speculative excess demand function based on which speculators choose their transactions to maximize their objective functions. Conversely, in the futures market literature, under rational expectations and common beliefs on the part of all traders, speculators are only the supporting actors while hedgers play the leading roles; speculators act only to reduce the imbalance between short and long hedging. The difference between these two approaches is, however, not as clear-cut as it seems to be. The reason is simply that hedgers often take some speculative positions in their decision-making process. Consequently, it can be argued that both speculators and non-speculators are active participants in the futures markets. This specific characteristic thus generates the ambiguities about the role of speculators in stabilizing or destabilizing market price in the futures market framework.
The main results of the thesis are as follows. From an ex post viewpoint, Chapter 1 indicates that profitable speculation will necessarily stabilize market price if and only if the non-speculative excess demand function is linear, with no lag structure and with the law of demand being satisfied. This conclusion falsifies the famous Friedman conjecture (i.e., profitable speculation necessarily stabilizes market price). We then study the case of linear non-speculative excess demand function using an ex ante approach. At a rational expectations equilibrium, it is shown that Friedman's conjecture holds when speculators' expected utility function can be expressed in terms of mean-variance consideration. Whether or not there are nonlinear non-speculative excess demand functions that verify the Friedman conjecture in ex ante framework is a matter for future research.
In Chapters 3 through S, we deal with two well-known asymmetries between short and long hedging, namely, asymmetric arbitrage opportunities and the so-called Houthakker effect. First, we show that the asymmetric arbitrage argument has no standing in the way of establishing the existence of a backwardation equilibrium in forward markets, whereas some highly restrictive assumptions must be imposed for the asymmetric arbitrage argument to lead to a backwardation equilibrium in a true futures market. Thus the theoretical argument for a link between asymmetric arbitrage opportunities and a backwardation equilibrium is weak. Yet the question remains as to whether or not asymmetric arbitrage opportunities prevail in functioning futures markets. This is studied in Chapter 4 with respect to wheat and corn futures contracts traded on the Chicago Board of Trade (CBOT). The results indicate that asymmetric arbitrage opportunities have impacts upon CBOT wheat futures markets, but not upon CBOT corn futures markets. Consequently, the asymmetric arbitrage argument may apply only to some specific commodities.
Finally, in Chapter 5, we apply the same sample to test the existence of the Houthakker effect. Again, the hypothesis is rejected. Therefore, the two well-known asymmetries between short and long hedging do not have impacts upon CBOT wheat and corn futures markets. notwithstanding their roles in the way of a backwardation equilibrium.
The thesis is concerned with developing an understanding of the way in which futures markets function, and the role of speculators and hedgers in the markets. The results presented here indicate that it is only under rather restrictive conditions that definite results concerning these issues can be derived, particularly in the context of the true futures markets, that is, markets in which several delivery options exist under a futures contract.
