Price Non-Convergence in Commodities: A Case Study of the Wheat Conundrum
AbstractThe close relationship between commodity future and cash prices is critical for the effectiveness of risk management and the functioning of price discovery. However, in recent years, commodity futures prices, across the board, have appeared increasingly detached from prices on physical markets. This paper argues that while various factors, identified in previous literature, which introduced limits to arbitrage have facilitated non-convergence, the actual extent of non-convergence in these markets is caused by essential differences in the mechanisms of price formation on physical and derivative markets. With reference to the particular case of the CBOT wheat market, the paper shows that the size of the spread between futures and cash prices can be theoretically and empirically linked to the increasing inflow of financial investment into commodity futures markets.
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Bibliographic InfoPaper provided by Department of Economics, SOAS, University of London, UK in its series Working Papers with number 185.
Length: 31 pages
Date of creation: Oct 2013
Date of revision:
commodity futures; commodity price formation; financialisation; nonconvergence;
Find related papers by JEL classification:
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- Q11 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Aggregate Supply and Demand Analysis; Prices
- Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance
This paper has been announced in the following NEP Reports:
- NEP-AGR-2013-10-18 (Agricultural Economics)
- NEP-ALL-2013-10-18 (All new papers)
- NEP-RMG-2013-10-18 (Risk Management)
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