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An analysis of illiquidity in commodity markets
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AbstractWe examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets. We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively. Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities. We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.
Title: An analysis of illiquidity in commodity markets
Description:
AbstractWe examine the liquidity and insurance premia demanded by hedgers and speculators in commodity markets.
We find that hedgers and speculators demand a higher premium for illiquid commodities for providing insurance and liquidity, respectively.
Decomposing illiquidity into turnover and size components, we find evidence of a size premium associated with the insurance premium such that speculators demand a larger insurance premium for smaller commodities.
We also find that the liquidity premium demanded by hedgers for illiquid commodities varies across bullish and bearish markets with hedgers demanding a larger premium from speculators trading in illiquid commodities in bearish markets.
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