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Do financial investors affect the price of wheat?

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  • Girardi, Daniele
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    Abstract

    It is widely debated whether financial speculation was a significant force behind recent food price fluctuations. As a matter of fact, during the 2000s agricultural commodity derivatives markets were flooded by a ‘wall of money’ coming from financial investors. In agricultural exchanges, the greatest part of this huge financial inflow came from index traders, i.e. financial actors that follow a passive strategy of tracking a commodity index. In this article I present new empirical evidence that supports the hypothesis that financial investments have affected wheat price dynamics in recent years. In particular, I focus on Hard Red Winter (HRW) wheat. 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, since both these relationships proved to be spurious, with the most tracked commodity index as the confounding variable.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40285.

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    Date of creation: 01 Jan 2012
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    Handle: RePEc:pra:mprapa:40285

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    Keywords: Agricultural Commodity Prices; Financialization; Commodity Futures Markets; Commodity Index Trading;

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    1. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers, International Food Policy Research Institute (IFPRI) 988, International Food Policy Research Institute (IFPRI).
    2. De Hoyos, Rafael E. & Medvedev, Denis, 2009. "Poverty effects of higher food prices : a global perspective," Policy Research Working Paper Series 4887, The World Bank.
    3. Parantap Basu & William T. Gavin, 2011. "What explains the growth in commodity derivatives?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 37-48.
    4. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    5. 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.
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    Cited by:
    1. Girardi, Daniele, 2012. "A brief essay on the financialization of agricultural commodity markets," MPRA Paper 44771, University Library of Munich, Germany.

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