Working Paper: NBER ID: w17921
Authors: Inghaw Cheng; Andrei Kirilenko; Wei Xiong
Abstract: This paper analyzes the joint responses of commodity futures prices and traders' futures positions to changes in the VIX before and after the recent financial crisis. We find that while financial traders accommodate the needs of commercial hedgers in normal times, in times of distress, financial traders reduce their net long positions in response to an increase in the VIX causing the risk to flow to commercial hedgers. By exploiting a cross-section of traders, we provide micro-level evidence for a convective flow of risk from distressed financial traders to the ultimate producers of commodities in the real economy.
Keywords: Commodity Futures; VIX; Financial Crisis; Risk Flow; Hedging
JEL Codes: G01; G12; G20; Q02
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| VIX (C58) | financial health of financial traders (G19) |
| VIX (C58) | net long positions of financial traders (CITs and hedge funds) (G23) |
| VIX (C58) | net short positions of commercial hedgers (G13) |
| financial distress of financial traders (G33) | VIX (C58) |
| net short hedgers (G13) | commodity futures (G13) |
| financial traders (CITs and hedge funds) (G15) | liquidity consumption from commercial hedgers (G19) |