The Effects of Decision Making on Futures Price Volatility
1996
Hennessy, David A. | Wahl, Thomas I.
Existing literature on commodity futures price volatility emphasizes time to expiration and the resolution of uncertainty. In this paper we stress the supply and demand inflexibilities arising from decision making. A decision made on the supply (demand) side makes future supply (demand) responses less elastic. Therefore, a shock arising after a decision is made is more effective in changing the futures price than a shock before the decision is made. The results support the time‐to‐maturity hypothesis, but do not conflict with the state variable hypotheses of futures price volatility. Evidence supporting the impacts of inflexibilities are presented for corn, soybean, and wheat contracts.
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