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Speculative pricing in the Liverpool cotton futures market: a nonlinear tale of noise traders and fundamentalists from the 1920s


  • Giulio Cifarelli

    (University of Florence)

  • Paolo Paesani

    () (University of Rome Tor Vergata)


In the 1920s and 1930s, empirical studies of cotton futures pricing tend to attribute market fluctuations to shifts in fundamentals. In this paper, we qualify this view focusing on the role of speculation. Our research is based on a nonlinear heterogeneous agents model which posits the existence of two categories of speculators, feedback traders and fundamentalists, who react (differently) to deviations of market prices from their fundamental value. The analysis is based on original data drawn from the online archives of The Times and on an historical description of the working of a staple commodity market. The empirical findings allow us to conclude that whereas feedback traders tend to herd, fundamentalists are more affected by risk aversion and react but slowly to the underpricing/overpricing of the cotton contracts. As expected, the presence of fundamentalists stabilizes the market even if, at least in the time period under investigation, the behavior of feedback traders is the major driver of short-run price dynamics.

Suggested Citation

  • Giulio Cifarelli & Paolo Paesani, 2016. "Speculative pricing in the Liverpool cotton futures market: a nonlinear tale of noise traders and fundamentalists from the 1920s," Cliometrica, Journal of Historical Economics and Econometric History, Association Française de Cliométrie (AFC), vol. 10(1), pages 31-54, january.
  • Handle: RePEc:afc:cliome:v:10:y:2016:i:1:p:31-54

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    More about this item


    Behavioral finance Speculation Historical cotton futures markets;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913


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