(DP 1978-12) Normal Backwardation and Hedging Asymmetry

L. S. Venkataramanan


Two important questions have been raised in academic discussions on commodity futures markets: (1) Do speculators receive positive return for the risk bearing services they provide? and (2) Why are hedgers net short and speculators net long? This paper reviews the theory of Normal Backwardation and Hedging Asymmetry theories, which provide theoretical explanations to the questions, stated above. The econometric investigation of eight Indian futures markets reported in this paper provides evidence: (a) to show that long speculators have received positive return in most Indian futures markets and (b) to support that hedgers are net short.

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