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Broker-Dealer Risk Appetite and Commodity Returns

Broker-Dealer Risk Appetite and Commodity Returns This article shows that the risk-bearing capacity of U.S. securities broker-dealers is an important determinant of risk premia in commodity derivatives markets where broker-dealers serve as counterparties to producers and consumers seeking to hedge commodity price risk. I capture the limits of arbitrage that govern these transactions within a simple asset pricing model, which predicts that the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. This prediction receives strong empirical support in the data. Fluctuations in broker-dealer risk-bearing capacity have particularly strong forecasting power for energy returns, both in-sample and out-of-sample. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Econometrics Oxford University Press

Broker-Dealer Risk Appetite and Commodity Returns

Etula, Erkko
Journal of Financial Econometrics , Volume 11 (3) – Jun 10, 2013
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Publisher
Oxford University Press
Copyright
The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com
ISSN
1479-8409
eISSN
1479-8417
DOI
10.1093/jjfinec/nbs024
Publisher site
See Article on Publisher Site

Abstract

This article shows that the risk-bearing capacity of U.S. securities broker-dealers is an important determinant of risk premia in commodity derivatives markets where broker-dealers serve as counterparties to producers and consumers seeking to hedge commodity price risk. I capture the limits of arbitrage that govern these transactions within a simple asset pricing model, which predicts that the price of aggregate commodity risk decreases in the relative leverage of the broker-dealer sector. This prediction receives strong empirical support in the data. Fluctuations in broker-dealer risk-bearing capacity have particularly strong forecasting power for energy returns, both in-sample and out-of-sample.

Journal

Journal of Financial Econometrics – Oxford University Press

Published: Jun 10, 2013

Keywords: JEL G10 G12 G13 G24

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