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Do financial investors affect commodity prices? The case of Hard Red Winter Wheat

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  • Girardi, Daniele
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    Abstract

    The aim of this paper is to assess empirically whether speculative financial investments have affected wheat price dynamics in recent years. To address this issue we will (1) analyze recent agricultural price dynamics and their drivers (2) outline the process of ‘financialization’ of agricultural commodity markets, identifying the macroeconomic, monetary and legislative factors which favored it and (3) present an econometric analysis using Hard Red Winter (HRW) wheat as a case study. Since 2007 HRW wheat price fluctuations have been positively related to US stock market returns and oil price movements. These correlations appear to be determined by commodity index traders, a category of financial investors, since both these relationships proved to be spurious, with the most tracked commodity index as the confounding variable.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 35670.

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    Date of creation: 15 Nov 2011
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    Handle: RePEc:pra:mprapa:35670

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    Keywords: Agricultural Commodity Prices; Global Commodity Crises; Financialization; Commodity Futures Markets; Commodity Index Trading; Agricultural Markets; Commodity Futures Pricing;

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    1. Mitchell, Donald, 2008. "A note on rising food prices," Policy Research Working Paper Series 4682, The World Bank.
    2. Gary Gorton & K. Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," Yale School of Management Working Papers, Yale School of Management amz2619, Yale School of Management, revised 01 Mar 2005.
    3. Rafael E. de Hoyos & Denis Medvedev, 2011. "Poverty Effects of Higher Food Prices: A Global Perspective," Review of Development Economics, Wiley Blackwell, Wiley Blackwell, vol. 15(3), pages 387-402, 08.
    4. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers 988, International Food Policy Research Institute (IFPRI).
    5. Dwight R. Sanders & Scott H. Irwin, 2010. "A speculative bubble in commodity futures prices? Cross-sectional evidence," Agricultural Economics, International Association of Agricultural Economists, vol. 41(1), pages 25-32, 01.
    6. Christopher L. Gilbert, 2008. "How to Understand High Food Prices," Department of Economics Working Papers 0823, Department of Economics, University of Trento, Italia.
    7. Donald W. K. Andrews, 2003. "Tests for Parameter Instability and Structural Change with Unknown Change Point: A Corrigendum," Econometrica, Econometric Society, Econometric Society, vol. 71(1), pages 395-397, January.
    8. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
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