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2010•Research on the Generalized Virtual EconomyRequires access

Price Stability of Storable Commodities in Spot and Futures Markets:A Dynamic Equilibrium Model of Spot and Futures Markets

HE Zhan-hong

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Abstract

This paper builds a dynamic equilibrium model of spot and futures markets, analyzes the effects of futures trading in a market for a storable commodity in which output is certain and all agents have access to identical information. We are able to draw a nearly definitive conclusion on this issue that the futures market stabilizes the spot price. In this paper, we first bring up the concept and formula of competitive expectations on price, which is a good explanation of the price discovery function of futures markets, and leads to price stability.

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What this paper is about

This paper builds a dynamic equilibrium model of spot and futures markets, analyzes the effects of futures trading in a market for a storable commodity in which output is certain and all agents have access to identical information. We are able to draw a nearly definitive conclusion on this issue that the futures market stabilizes the spot price. In this paper, we first bring up the concept and formula of competitive expectations on price, which is a good explanation of the price discovery function of futures markets, and leads to price stability.

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Available abstract

This paper builds a dynamic equilibrium model of spot and futures markets, analyzes the effects of futures trading in a market for a storable commodity in which output is certain and all agents have access to identical information. We are able to draw a nearly definitive conclusion on this issue that the futures market stabilizes the spot price. In this paper, we first bring up the concept and formula of competitive expectations on price, which is a good explanation of the price discovery function of futures markets, and leads to price stability.

Key concepts: Futures contract, Normal backwardation, Spot contract, Economics, Spot market, Forward market, Contango, Price discovery

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Price Stability of Storable Commodities in Spot and Futures Markets:A Dynamic Equilibrium Model of Spot and Futures Markets — Research Paper | ScholarLens