Creator: Chari, V. V., Jagannathan, Ravi, and Jones, Larry E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 316 Abstract:
In this paper, we characterize those situations in which after the introduction of futures markets there is either an unambiguous change in the volatility of spot prices or an unambiguous change in welfare. We provide examples of the usefulness of this approach by giving two alternative sets of sufficient conditions for price volatility to decline following the introduction of futures trading. We also provide a set of sufficient conditions for the introduction of futures trading to increase the welfare of all agents.
Keyword: Futures market, Prices, and Commodities Subject (JEL): O16 - Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance