The Effects of Hedging and Speculation on Cash-Futures Basis: Results from U.S. Wheat Markets

Abstract

This study examines impacts of hedging and speculation shocks on cash-futures basis for three types of wheat produced in the Northwest U.S. Volatility transfers are measured using a Bayesian vector autoregression (BVAR). The results demonstrate a pattern of significant impulse responses to basis from shocks to hedging and speculative total open interest for each market. Positive shocks to open interest create contemporaneous positive impacts on the basis, which implies the risk premium nested within the basis also varies with shocks to hedging and speculative positions. Historical decompositions indicate that hedger and speculator total open interest explains short-run basis volatility for Chicago and Kansas City markets, but not for the Minneapolis market. This information is valuable to hedgers and liquidity providers, as well as producers, distributors, and exporters.