Abstract
We 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.
| Original language | English |
|---|---|
| Article number | Volume 39 issue 8 |
| Pages (from-to) | 962-984 |
| Number of pages | 23 |
| Journal | Journal of Futures Markets |
| DOIs | |
| Publication status | Published - 28 Mar 2019 |