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The Role of Index Trading in Price Formation in the Grains and Oilseeds Markets*

* This paper is a replication of an original study

Author

Listed:
  • Christopher L. Gilbert
  • Simone Pfuderer

Abstract

type="main" xml:id="jage12068-abs-0001"> We use both Granger-causality and instrumental variables (IV) methods to examine the impact of index fund positions on price returns for the main US grains and oilseed futures markets. Our analysis supports earlier conclusions that Granger-causal impacts are generally not discernible. However, market microstructure theory suggests trading impacts should be instantaneous. IV-based tests for contemporaneous causality provide stronger evidence of price impact. We find even stronger evidence that changes in index positions can help predict future changes in aggregate commodity price indices. This result suggests that changes in index investment are in part driven by information which predicts commodity price changes over the coming months.

Suggested Citation

  • Christopher L. Gilbert & Simone Pfuderer, 2014. "The Role of Index Trading in Price Formation in the Grains and Oilseeds Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 65(2), pages 303-322, June.
  • Handle: RePEc:bla:jageco:v:65:y:2014:i:2:p:303-322
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    File URL: http://hdl.handle.net/10.1111/jage.2014.65.issue-2
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    Replication

    This item is a replication of:
  • Dwight R. Sanders & Scott H. Irwin, 2011. "New Evidence on the Impact of Index Funds in U.S. Grain Futures Markets," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 59(4), pages 519-532, December.
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    1. The Role of Index Trading in Price Formation in the Grains and Oilseeds Markets (J Agr Econ 2014) in ReplicationWiki

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