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van Huellen, Sophie (2019) 'Price Discovery in Commodity Futures and Cash Markets with Heterogeneous Agents.' Journal of International Money and Finance, 95. pp. 1-13.

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Abstract

Since 2004, commodity futures markets have seen an unprecedented liquidity inflow linked to noise traders that follow global liquidity cycles rather than market fundamentals. This paper develops a price discovery model for commodity futures markets that incorporates noise trader effects by assuming two forms of limits to arbitrage: transaction costs and noise trader risk. It is shown that under these assumptions, commodity prices are driven by both market fundamentals and noise trader positions. Further, noise trader effects spill over to the cash market if limits to arbitrage due to transaction costs are imperfect but are confined to the futures market otherwise. The model is empirically tested using data from six grain and soft commodity markets.

Item Type: Journal Article
SOAS Departments & Centres: Departments and Subunits > Department of Economics
ISSN: 02615606
Copyright Statement: © 2019 Elsevier Ltd. All rights reserved. This version is available under a Creative Commons Attribution Non-Commercial No Derivatives License (https://creativecommons.org/licenses/by-nc-nd/4.0/legalcode).
DOI (Digital Object Identifier): https://doi.org/10.1016/j.jimonfin.2019.03.003
Date Deposited: 29 Mar 2019 16:32
URI: https://eprints.soas.ac.uk/id/eprint/30557
Related URLs: https://www.sci ... 172X?via%3Dihub

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