Modeling Financial Markets with Heterogeneous Agents
I construct a dynamic equilibrium model of storable commodities populated by producers, dealers, and households. When financial innovation allows households to trade in futures markets, they choose a long position that leads to lower equilibrium excess returns on futures, a more frequently upward-sloping futures curve, and higher volatility in futures and spot markets. The eect on spot price levels is modest, and extremely high spot prices only occur in conjunction with low inventories and poor productivity. Therefore the “financialization” of commodities may explain several recently observed changes in spot and futures market dynamics, but it cannot directly account for a large increase in spot prices.