IDEAS home Printed from https://ideas.repec.org/a/bla/agecon/v41y2010i1p25-32.html
   My bibliography  Save this article

A speculative bubble in commodity futures prices? Cross‐sectional evidence

Author

Listed:
  • Dwight R. Sanders
  • Scott H. Irwin

Abstract

Recent accusations against speculators in general and long‐only commodity index funds in particular include: increasing market volatility, distorting historical price relationships, and fueling a rapid increase and decrease in the level of commodity prices. Some researchers have argued that these market participants—through their impact on market prices—may have inadvertently prevented the efficient distribution of food aid to deserving groups. Certainly, this result—if substantiated—would counter the classical argument that speculators make prices more efficient and thus improve the economic efficiency of the food marketing system. Given the very important policy implications, it is crucial to develop a more thorough understanding of long‐only index funds and their potential market impact. Here, we review the criticisms (and rebuttals) levied against (and for) commodity index funds in recent U.S. Congressional testimonies. Then, additional empirical evidence is added regarding cross‐sectional market returns and the relative levels of long‐only index fund participation in 12 commodity futures markets. The empirical results provide scant evidence that long‐only index funds impact returns across commodity futures markets.

Suggested Citation

  • 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, January.
  • Handle: RePEc:bla:agecon:v:41:y:2010:i:1:p:25-32
    DOI: 10.1111/j.1574-0862.2009.00422.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1574-0862.2009.00422.x
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Summers, Lawrence H, 1986. "Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    2. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. Robles, Miguel & Torero, Maximo & von Braun, Joachim, 2009. "When speculation matters:," Issue briefs 57, International Food Policy Research Institute (IFPRI).
    4. Sanders, Dwight R. & Boris, Keith & Manfredo, Mark, 2004. "Hedgers, funds, and small speculators in the energy futures markets: an analysis of the CFTC's Commitments of Traders reports," Energy Economics, Elsevier, vol. 26(3), pages 425-445, May.
    5. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
    6. Working, Holbrook, 1960. "Speculation on Hedging Markets," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 1(2), pages 1-36.
    7. Daniel, Kent, 2001. "The power and size of mean reversion tests," Journal of Empirical Finance, Elsevier, vol. 8(5), pages 493-535, December.
    8. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(2), August.
    9. Sanders, Dwight R. & Irwin, Scott H. & Merrin, Robert P., 2009. "Smart Money: The Forecasting Ability of CFTC Large Traders in Agricultural Futures Markets," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 34(2), pages 1-21, August.
    10. Henry L. Bryant & David A. Bessler & Michael S. Haigh, 2006. "Causality in futures markets," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 26(11), pages 1039-1057, November.
    11. Irwin, Scott H. & Good, Darrel L., 2009. "Market Instability in a New Era of Corn, Soybean, and Wheat Prices," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, issue 1, pages 1-6.
    12. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-738, August.
    13. Derek Headey & Shenggen Fan, 2008. "Anatomy of a crisis: the causes and consequences of surging food prices," Agricultural Economics, International Association of Agricultural Economists, vol. 39(s1), pages 375-391, November.
    14. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
    15. Jegadeesh, Narasimhan, 1991. "Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K," Journal of Finance, American Finance Association, vol. 46(4), pages 1427-1444, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Scott H. Irwin & Dwight R. Sanders, 2011. "Index Funds, Financialization, and Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 33(1), pages 1-31.
    2. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.
    3. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
    4. Georg Lehecka, 2015. "Do hedging and speculative pressures drive commodity prices, or the other way round?," Empirical Economics, Springer, vol. 49(2), pages 575-603, September.
    5. Grosche, Stephanie, 2012. "Limitations of Granger Causality Analysis to assess the price effects from the financialization of agricultural commodity markets under bounded rationality," Discussion Papers 121868, University of Bonn, Institute for Food and Resource Economics.
    6. Shanker, Latha, 2017. "New indices of adequate and excess speculation and their relationship with volatility in the crude oil futures market," Journal of Commodity Markets, Elsevier, vol. 5(C), pages 18-35.
    7. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    8. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    9. Dwight R. Sanders and Scott H. Irwin, 2013. "Measuring Index Investment in Commodity Futures Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    10. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    11. Vijay Kumar Varadi, 2012. "An evidence of speculation in Indian commodity markets," EconStor Preprints 57430, ZBW - Leibniz Information Centre for Economics.
    12. Manera, Matteo & Nicolini, Marcella & Vignati, Ilaria, 2016. "Modelling futures price volatility in energy markets: Is there a role for financial speculation?," Energy Economics, Elsevier, vol. 53(C), pages 220-229.
    13. Mayer, Herbert & Rathgeber, Andreas & Wanner, Markus, 2017. "Financialization of metal markets: Does futures trading influence spot prices and volatility?," Resources Policy, Elsevier, vol. 53(C), pages 300-316.
    14. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    15. Xiaoliang Liu & Guenther Filler & Martin Odening, 2013. "Testing for speculative bubbles in agricultural commodity prices: a regime switching approach," Agricultural Finance Review, Emerald Group Publishing, vol. 73(1), pages 179-200, May.
    16. Du, Xiaodong & Yu, Cindy L. & Hayes, Dermot J., 2011. "Speculation and volatility spillover in the crude oil and agricultural commodity markets: A Bayesian analysis," Energy Economics, Elsevier, vol. 33(3), pages 497-503, May.
    17. Lam, F.Y. Eric C. & Wei, K.C. John, 2011. "Limits-to-arbitrage, investment frictions, and the asset growth anomaly," Journal of Financial Economics, Elsevier, vol. 102(1), pages 127-149, October.
    18. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, January.
    19. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    20. Douglas W. Blackburn & Nusret Cakici, 2020. "Tangible and intangible information in emerging markets," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1509-1527, May.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:agecon:v:41:y:2010:i:1:p:25-32. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley Content Delivery). General contact details of provider: https://edirc.repec.org/data/iaaeeea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.