Futures Trading, Storage and the Division of Risk: A Multiperiod Analysis

Posted: 1 Dec 2008

See all articles by David A. Hirshleifer

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Abstract

This paper analyzes the interaction of storage and futures trading when producers make decisions covering many harvests. In this more general context, by examining how risks are distributed between storers and growers, results are obtained that differ dramatically from previous models in the literature. When storage is costly, storers may reduce risk by taking long hedging positions, rather than selling inventories short. Contrary to the conventional view (in a tradition beginning with J. M. Keynes and J. R. Hicks), costless storage does not imply downward bias of futures prices (" normal backwardation"). Hedging against the optimally varying planting costs promotes upward price bias (" contango"), while hedging against storage costs to be incurred promotes downward bias. When the risks faced by growers and storers are negatively correlated, futures trading can substitute for vertical integration as a means of reducing risk.

Suggested Citation

Hirshleifer, David A., Futures Trading, Storage and the Division of Risk: A Multiperiod Analysis. Economic Journal, Vol. 99, No. 397, pp. 700-719, September 1989, Available at SSRN: https://ssrn.com/abstract=1279707

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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