Default Premiums in Commodity Markets: Theory and Evidence

The authors model the effect on nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the "Hunt Brothers" episode. Changes in default premiums are measured and related to the sequence of events in the metals markets during this period. Results suggest that ex ante costs of nonperformance can be a significant, priced factor in commodity markets and that the arrival of new information is often associated with changes in these costs. The evidence has implications for both theoretical and empirical research on commodity markets. Copyright 1991 by American Finance Association.

[1]  Peter Carr,et al.  The Valuation of Sequential Exchange Opportunities , 1988 .

[2]  K. French,et al.  Commodity own rates, real interest rates, and money supply announcements☆ , 1986 .

[3]  The behavior of event‐related returns on oil futures contracts , 1984 .

[4]  L. Harris.  The October 1987 S&P 500 Stock‐Futures Basis , 1989 .

[5]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[6]  Eduardo S. Schwartz,et al.  Evaluating Natural Resource Investments , 1985 .

[7]  G. Morgan,et al.  Default Risk in Futures Markets: The Customer‐Broker Relationship , 1990 .

[8]  David A. Hirshleifer,et al.  Risk, Futures Pricing, and the Organization of Production in Commodity Markets , 1988, Journal of Political Economy.

[9]  A. Bhattacharya.  The joint effect of housing start and inflation announcements on GNMA futures prices , 1986 .

[10]  Ravi Jagannathan,et al.  An Investigation of Commodity Futures Prices Using the Consumption‐Based Intertemporal Capital Asset Pricing Model , 1985 .

[11]  Andrew H. Chen,et al.  An Analysis of Divestiture Effects Resulting from Deregulation , 1986 .

[12]  E. Kane.  Market Incompleteness and Divergences Between Forward and Futures Interest Rates , 1980 .

[13]  Ben S. Bernanke,et al.  Clearing and Settlement During the Crash , 1990 .

[14]  M. Brennan.  The Supply of Storage , 1976 .

[15]  S. Ross,et al.  The relation between forward prices and futures prices , 1981 .

[16]  Larry Y. Dann,et al.  Corporate financial policy and corporate control: A study of defensive adjustments in asset and ownership structure , 1988 .

[17]  Herb Johnson,et al.  The Pricing of Options with Default Risk , 1987 .

[18]  E. Fama,et al.  Commodity futures prices: some evidence on forecast power , 1987 .

[19]  Katherine Dusak.  Futures Trading and Investor Returns: An Investigation of Commodity Market Risk Premiums , 1973, Journal of Political Economy.

[20]  S. Richard,et al.  A continuous time equilibrium model of forward prices and futures prices in a multigood economy , 1981 .

[21]  Michael D. Ryngaert.  The effect of poison pill securities on shareholder wealth , 1988 .

[22]  A. Craig MacKinlay,et al.  Order Imbalances and Stock Price Movements on October 19 and 20, 1987 , 1989 .

[23]  Robert A. Jarrow,et al.  Arbitrage, Continuous Trading, and Margin Requirements , 1987 .

[24]  T. Schneeweis,et al.  The Effect of Three Mile Island on Electric Utility Stock Prices: A Note , 1983 .

[25]  L. Hansen,et al.  Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis , 1980, Journal of Political Economy.

[26]  J. Rolfo,et al.  Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer , 1980, Journal of Political Economy.

[27]  M. Brennan.  A theory of price limits in futures markets , 1986 .

[28]  A. Marcus,et al.  Futures Markets and Production Decisions , 1984, Journal of Political Economy.

[29]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[30]  S. Ross,et al.  Option pricing: A simplified approach☆ , 1979 .

[31]  E. Fama,et al.  Business Cycles and the Behavior of Metals Prices , 1988 .

[32]  David Hsieh,et al.  Rational Expectations and Risk Premia in Forward Markets: Primary Metals at the London Metals Exchange , 1982 .

[33]  F. Edwards.  The clearing association in futures markets: Guarantor and regulator , 1983 .

[34]  Ronald W. Anderson.  The Industrial organization of futures markets , 1984 .

[35]  R. Roll.  Orange Juice and Weather , 1984 .