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The European Finance Associaton AwardThe European Finance Associaton awarded to Viral.V.Acharya, Lars A. Lochstoer and Tarun Ramadorai the Viz Risk Management Price for best paper on Energy Markets, Securities and Prices. The paper is named: Limits to Arbitrage and Hedging: Evidence from Commodity Markets (see also abstract). The price is EUR 3.000 Frank Carlsen, CEO of Viz Risk Management, said in his speech at the EFA conference at NHH "Since much of the success of Viz Risk Management is based on applying academic modeling into practical use, we are very pleased to be the sponsor of this award and congratulate the winners and Professor Miltersen for a well-organized conference". The EFA conference is an annual meeting with about 500 delegates. Abstract: We build an equilibrium model with commodity producers that are averse to future cash-flow variability, and hedge using futures contracts. Their hedging demand is met by financial intermediaries who act as speculators, but are constrained in risk-taking. Increases (decreases) in producers. hedging demand (the risk-bearing capacity of speculators) increase the costs of hedging, which preclude producers from holding large inventories, and thus reduce spot prices. Using oil and gas market data from 1980-2006, we show that producers' hedging demand - proxied by their default risk - forecasts spot prices, futures prices and inventories, consistent with our model. Our analysis demonstrates that limits to financial arbitrage can generate limits to hedging by firms, affecting prices in both asset and goods markets. Updated: 27.08.2009 12:30 |
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