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Abstract
Analysis of the cotton futures price spike and its effects on commercial hedgers
suggest that we do not completely understand the behavior of markets and firms in periods
of extreme volatility. After presenting the story of the cotton futures price spike, this paper
argues that explanations related to the funding liquidity of firms and the liquidity of the
markets themselves may help us better understand market volatility. A simple model of
futures market equilibrium in the presence of liquidity constraints demonstrates how prices
can spike as fast as they did and why such spikes can drive firms to exit.