Essays on futures markets: Hedging, transaction costs, and welfare

This dissertation studies contingent markets when the economy (market) faces stochastic output or demand. Focusing on futures markets, this dissertation examines the market equilibrium conditions such as prices and quantities in both spot and futures markets, effect of exogenous variables (i.e. transaction costs, carry-over cost, convenience yield, etc.) on the equilibrium, and welfare of hedging opportunities. This dissertation is a theoretical one consisting of three main subjects--Hedging, Transaction Costs and Welfare--with empirical implications of results derived from the theoretical models developed in this dissertation. Some parts of the dissertation has been rewritten and presented at professional meetings, and also submitted to professional journals for publication.;The second chapter examines the spot and futures markets equilibrium under rational expectation with mean-variance utility functions when the producers facing non-negative transaction costs engage in hedging against the uncertain revenue. The results derived are; (i) an increase in transaction costs reduces the trading volumes of futures contracts which results in lower output; and (ii) the effect on risk premium depends on the degree of risk aversion of the producers and speculators. The model presented in this chapter suggests that the inclusion of transaction costs makes the estimates of hedgers' and speculators' risk averse coefficients possible.;The third chapter studies the welfare of futures trading when producers in a competitive market face production risk. Risk adjusted profit functions that take the same form as mean variance utility functions are used for producers and speculators. The analysis is conducted under the assumption that consumers do not trade futures contracts. A stochastic variable enters into the production function multiplicatively. Both producers and speculators assumed to be risk averse. Under these conditions, I find that; (i) consumers neither gain nor lose in the short-run, while producers gain; (ii) consumers gain in the intermediate run, while producers might gain or lose, depending on the price elasticity of demand; and (iii) in the long-run, when the risk adjusted expected profits of producers are zero, consumers will gain because of an increase in planned aggregate output.;The first chapter examines existing theoretical models and previous empirical discussions of contingent markets. Portfolio approach and expected utility maximization models are examined with close look.