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An analysis of the stabilizing and welfare effects of intervention in spot and futures markets

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  • Campbell, Robert B.
  • Turnovsky, Stephen J.

Abstract

This paper analyzes the effects of three alternative rules on the long-run distributions of both the spot and futures prices ina single commodity market, in which the key behavioral relationships are derived from the optimizing behavior of producers and speculators.The rules considered include: (i) leaning against the wind in the spot market; (ii) utility maximizing speculative behavior by the stabilization authority in the futures market; (iii) leaning against the wind in the futures market. Since the underlying model is sufficiently complex to preclude analytical solutions, the analysis makes extensive use of simulation methods. As a general proposition we find that intervention in the futures market is not as effective in stabilizing either the spot price of the futures price as is intervention in the spot market. Indeed, Rule (iii), while stabilizing the futures price may actually destabilize the spot price. Furthermore, the analogous type of rule undertaken in the spot market will always stabilize the futures price to a greater degree than it does the spot price. The welfare implications of these rules are also discussed. Our analysis shows how these can generate rather different distributions of welfare gains, including the overall benefits.
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  • Campbell, Robert B. & Turnovsky, Stephen J., 1985. "An analysis of the stabilizing and welfare effects of intervention in spot and futures markets," Journal of Public Economics, Elsevier, vol. 28(2), pages 165-209, November.
    • Handle: RePEc:eee:pubeco:v:28:y:1985:i:2:p:165-209
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    1. Turnovsky, Stephen J & Campbell, Robert B, 1985. "The Stabilizing and Welfare Properties of Futures Markets: A Simulation Approach," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 277-303, June.
    2. Turnovsky, Stephen J, 1983. "The Determination of Spot and Futures Prices with Storable Commodities," Econometrica, Econometric Society, vol. 51(5), pages 1363-1387, September.
    3. Newbery, D M G & Stiglitz, J E, 1979. "The Theory of Commodity Price Stabilisation Rules: Welfare Impacts and Supply Responses," Economic Journal, Royal Economic Society, vol. 89(356), pages 799-817, December.
    4. Kawai, Masahiro, 1983. "Price Volatility of Storable Commodities under Rational Expectations in Spot and Futures Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(2), pages 435-459, June.
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    6. Bray, Margaret M, 1981. "Futures Trading, Rational Expectations, and the Efficient Markets Hypothesis," Econometrica, Econometric Society, vol. 49(3), pages 575-596, May.
    7. McCafferty, Stephen & Driskill, Robert, 1980. "Problems of Existence and Uniqueness in Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 48(5), pages 1313-1317, July.
    8. Rolfo, Jacques, 1980. "Optimal Hedging under Price and Quantity Uncertainty: The Case of a Cocoa Producer," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 100-116, February.
    9. Randall A. Kramer & Rulon D. Pope, 1981. "Participation in Farm Commodity Programs: A Stochastic Dominance Analysis," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(1), pages 119-128.
    10. Gershon Feder & Richard E. Just & Andrew Schmitz, 1980. "Futures Markets and the Theory of the Firm under Price Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 317-328.
    11. Steven T. Buccola, 1981. "The Supply and Demand of Marketing Contracts under Risk," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 63(3), pages 503-509.
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    1. Innes, Robert, 1987. "Government Target Price Intervention in Economies with Incomplete Markets: Welfare and Distribution," 1987 Annual Meeting, August 2-5, East Lansing, Michigan 270102, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Umar, Muhammad & Su, Chi-Wei & Rizvi, Syed Kumail Abbas & Lobonţ, Oana-Ramona, 2021. "Driven by fundamentals or exploded by emotions: Detecting bubbles in oil prices," Energy, Elsevier, vol. 231(C).

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