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A speculative bubble in commodity futures prices? Cross-sectional evidence

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  • Dwight R. Sanders
  • Scott H. Irwin

Abstract

Recent accusations against speculators in general and long-only commodity index funds in particular include: increasing market volatility, distorting historical price relationships, and fueling a rapid increase and decrease in the level of commodity prices. Some researchers have argued that these market participants-through their impact on market prices-may have inadvertently prevented the efficient distribution of food aid to deserving groups. Certainly, this result-if substantiated-would counter the classical argument that speculators make prices more efficient and thus improve the economic efficiency of the food marketing system. Given the very important policy implications, it is crucial to develop a more thorough understanding of long-only index funds and their potential market impact. Here, we review the criticisms (and rebuttals) levied against (and for) commodity index funds in recent U.S. Congressional testimonies. Then, additional empirical evidence is added regarding cross-sectional market returns and the relative levels of long-only index fund participation in 12 commodity futures markets. The empirical results provide scant evidence that long-only index funds impact returns across commodity futures markets. Copyright (c) 2010 International Association of Agricultural Economists.

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Bibliographic Info

Article provided by International Association of Agricultural Economists in its journal Agricultural Economics.

Volume (Year): 41 (2010)
Issue (Month): 1 (01)
Pages: 25-32

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Handle: RePEc:bla:agecon:v:41:y:2010:i:1:p:25-32

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  1. Robles, Miguel & Torero, Maximo & von Braun, Joachim, 2009. "When speculation matters:," Issue briefs 57, International Food Policy Research Institute (IFPRI).
  2. Working, Holbrook, 1960. "Speculation on Hedging Markets," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02, May.
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Cited by:
  1. Baldi, Lucia & Peri, Massimo & Vandone, Daniela, 2011. "Price Discovery in Agricultural Commodities: The Shifting Relationship Between Spot and Future Prices," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114237, European Association of Agricultural Economists.
  2. Modena, Matteo, 2011. "Agricultural commodities and financial markets," MPRA Paper 36416, University Library of Munich, Germany, revised 30 Sep 2011.
  3. Vijay Kumar Varadi, 2012. "An evidence of speculation in Indian commodity markets," EconStor Preprints 57430, ZBW - German National Library of Economics.
  4. Gunther Capelle-Blancard & Dramane Coulibaly, 2011. "Index trading and agricultural commodity prices: A panel Granger causality analysis," Economie Internationale, CEPII research center, issue 126-127, pages 51-72.
  5. Liu, Xiaoliang & Filler, Gunther & Odening, Martin, 2012. "Testing for Speculative Bubbles in Agricultural Commodity Prices: A Regime Switching Approach," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122554, European Association of Agricultural Economists.
  6. Beckmann, Joscha & Czudaj, Robert, 2014. "Volatility transmission in agricultural futures markets," Economic Modelling, Elsevier, vol. 36(C), pages 541-546.
  7. Girardi, Daniele, 2011. "Do financial investors affect commodity prices? The case of Hard Red Winter Wheat," MPRA Paper 35670, University Library of Munich, Germany.
  8. Vipin Arora & Pedro Gomis-Porqueras & Shuping Shi, 2011. "Testing for Explosive Behaviour in Relative Inflation Measures: Implications for Monetary Policy," Development Research Unit Working Paper Series 37-11, Monash University, Department of Economics.
  9. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(03), August.
  10. Scott H. Irwin & Dwight R. Sanders, 2011. "Index Funds, Financialization, and Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 1-31.
  11. Gilbert, Christopher L., 2012. "Speculative impacts on grains price volatility," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122540, European Association of Agricultural Economists.
  12. Robert Czudaj & Joscha Beckmann, 2012. "Spot and futures commodity markets and the unbiasedness hypothesis - evidence from a novel panel unit root test," Economics Bulletin, AccessEcon, vol. 32(2), pages 1695-1707.
  13. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
  14. Bernhard Troester, 2012. "The determinants of the recent food price surges – A basic supply and demand model," Competence Centre on Money, Trade, Finance and Development 1206, Hochschule fuer Technik und Wirtschaft, Berlin.
  15. Ing-Haw Cheng & Wei Xiong, 2013. "The Financialization of Commodity Markets," NBER Working Papers 19642, National Bureau of Economic Research, Inc.
  16. Ott, Herve, 2012. "Which factors drive which volatility in the grain sector?," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122486, European Association of Agricultural Economists.
  17. Holst, Carsten, 2010. "How predictable are prices of agricultural commodities? The possibilities and constraints of forecasting wheat prices," IAMO Forum 2010: Institutions in Transition – Challenges for New Modes of Governance 52717, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO).

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