Does Futures Speculation Destabilize Spot Prices? New Evidence for Commodity Markets

Motivated by repeated price spikes and crashes over the last decade, we investigate whether the growing market shares of futures speculators destabilize commodity spot prices. We approximate conditional volatility and analyze how it is affected by speculative open interest. In this context, we split our sample into two equally long subperiods and document whether the speculative impact on conditional volatility increases. With respect to six heavily traded agricultural and energy commodities, we do not find robust evidence that this is the case. We thus conclude that the financialization of raw material markets does not make them more volatile.