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The Adequacy of Speculation in Agricultural Futures Markets:Too Much of a Good Thing?

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  • Sanders, Dwight R.
  • Irwin, Scott H.
  • Merrin, Robert P.

Abstract

Long-only commodity index funds have been blamed by other futures market participants for inflating commodity prices, increasing market volatility, and distorting historical price relationships. Much of this criticism is leveled without any formal empirical support or even cursory data analyses. The Commodity Futures Trading Commission makes available the positions held by index funds and other large traders in their Commitment’s of Traders report. In this research, we make an initial assessment of the size and activity of index funds in traditional agricultural futures markets. The results suggest that after an initial surge from early 2004 through mid-2005, index fund positions have stabilized as a percent of total open interest. Speculative measures—such as Working’s T—suggest that long-only funds may provide a benefit in markets traditionally dominated by short hedging.

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Bibliographic Info

Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37615.

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Date of creation: 2008
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Handle: RePEc:ags:nccest:37615

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Keywords: Commitment’s of Traders; index funds; commodity futures markets; Agricultural Finance;

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References

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  1. Gary B. Gorton & Fumio Hayashi & K. Geert Rouwenhorst, 2013. "The Fundamentals of Commodity Futures Returns," Review of Finance, European Finance Association, vol. 17(1), pages 35-105.
  2. Gary Gorton & K. Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," Yale School of Management Working Papers amz2619, Yale School of Management, revised 01 Mar 2005.
  3. Hardouvelis, Gikas A & Kim, Dongcheol, 1995. "Price Volatility and Futures Margins," CEPR Discussion Papers 1263, C.E.P.R. Discussion Papers.
  4. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  5. Wang, Changyun, 2001. "The behavior and performance of major types of futures traders," MPRA Paper 36426, University Library of Munich, Germany, revised Jul 2002.
  6. Richard N. Cooper & Robert Z. Lawrence, 1975. "The 1972-75 Commodity Boom," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 671-724.
  7. Trostle, Ronald, 2008. "Factors Contributing to Recent Increases in Food Commodity Prices (PowerPoint)," Seminars 43902, USDA Economists Group.
  8. Sanders, Dwight R. & Irwin, Scott H. & Merrin, Robert P., 2007. "Smart Money? The Forecasting Ability of CFTC Large Traders," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37556, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
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Citations

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Cited by:
  1. Tokic, Damir, 2011. "Rational destabilizing speculation, positive feedback trading, and the oil bubble of 2008," Energy Policy, Elsevier, vol. 39(4), pages 2051-2061, April.
  2. Xiaodong Du & Cindy L. Yu & Dermot J. Hayes, 2009. "Speculation and Volatility Spillover in the Crude Oil and Agricultural Commodity Markets: A Bayesian Analysis," Center for Agricultural and Rural Development (CARD) Publications 09-wp491, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. Etienne, Xiaoli L. & Irwin, Scott H. & Garcia, Philip, 2013. "Dissecting Corn Price Movements with Directed Acyclic Graphs," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151279, Agricultural and Applied Economics Association.
  4. Emiliano Magrini & Ayca Donmez, 2013. "Agricultural Commodity Price Volatility and Its Macroeconomic Determinants: A GARCH-MIDAS Approach," JRC-IPTS Working Papers JRC84138, Institute for Prospective and Technological Studies, Joint Research Centre.
  5. Prehn, Sören & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2013. "Der Einfluss von Long-only-Indexfonds auf die Preisfindung und das Marktergebnis an landwirtschaftlichen Warenterminmärkten," IAMO Discussion Papers 142, Leibniz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
  6. Minot, Nicholas, 2011. "Transmission of world food price changes to markets in Sub-Saharan Africa:," IFPRI discussion papers 1059, International Food Policy Research Institute (IFPRI).
  7. Miffre, Joëlle & Brooks, Chris, 2013. "Do long-short speculators destabilize commodity futures markets?," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 230-240.
  8. Vijay Kumar Varadi, 2012. "An evidence of speculation in Indian commodity markets," EconStor Preprints 57430, ZBW - German National Library of Economics.
  9. Vincent Chatellier, 2011. "Price volatility, market regulation and risk management: challenges for the future of the CAP," Working Papers SMART - LERECO 11-04, INRA UMR SMART.
  10. Cooke, Bryce & Robles, Miguel, 2009. "Recent food prices movements: A time series analysis," IFPRI discussion papers 942, International Food Policy Research Institute (IFPRI).
  11. Brian D. Wright, 2012. "International Grain Reserves And Other Instruments to Address Volatility in Grain Markets," World Bank Research Observer, World Bank Group, vol. 27(2), pages 222-260, August.
  12. Ron Alquist and Olivier Gervais, 2013. "The Role of Financial Speculation in Driving the Price of Crude Oil," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
  13. Frank, Julieta & Garcia, Philip, 2009. "Bid-Ask Spreads, Volume, and Volatility: Evidence from Livestock Markets," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49575, Agricultural and Applied Economics Association.
  14. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
  15. Algieri, Bernardina, 2012. "Price Volatility, Speculation and Excessive Speculation in Commodity Markets: sheep or shepherd behaviour?," Discussion Papers 124390, University of Bonn, Center for Development Research (ZEF).
  16. Niels C. Thygesen & Robert N. McCauley & Guonan Ma & William R. White & Jakob de Haan & Willem van den End & Jon Frost & Christiaan Pattipeilohy & Mostafa Tabbae & Ernest Gnan & Morten Balling & Paul , 2013. "50 Years of Money and Finance: Lessons and Challenges," SUERF 50th Anniversary Volume - 50 Years of Money and Finance: Lessons and Challenges, SUERF - The European Money and Finance Forum, number 1 edited by Morten Balling & Ernest Gnan.
  17. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.

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