Abstract
This paper studies the dynamic interaction between the net
positions of commercial hedgers and non-commercial
speculators and risk premiums in commodity futures markets.
Short-term position changes are mainly driven by the liquidity
demands of non-commercial traders, while long-term variation
is primarily driven by the hedging demands from commercial
traders. These two components influence expected futures
returns with opposite signs. The gains from providing liquidity
by commercials largely offset the premium they pay for
obtaining price insurance.