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The "Necessity" of New Position Limits in Agricultural Futures Markets: The Verdict from Daily Firm-level Position Data

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  • Dwight R. Sanders
  • Scott H. Irwin

Abstract

Regulators are proposing new position limits in U.S. commodity futures markets while the actual impact of long-only index funds on futures prices continues to be debated. Researchers have noted the data limitations—frequency and market breadth—associated with using data compiled by the U.S. Commodity Futures Trading Commission (CFTC). This research addresses these shortfalls by using daily position data for a specific long-only index fund. The empirical analysis focuses on the firm-level position data across 13 U.S. agricultural futures markets. The firm-level data are shown to be representative of the overall index fund industry. Empirical tests fail to find any evidence linking the firm's trading with market returns. However, there does appear to be a consistent negative relationship between the firm's roll transactions and changes in calendar price spreads. Notably, the direction of this impact runs contrary to the price-pressure hypothesis. The results of this study, and others, indicate that a clear verdict can be reached—new limits on speculation in agricultural futures markets are unnecessary.

Suggested Citation

  • Dwight R. Sanders & Scott H. Irwin, 2016. "The "Necessity" of New Position Limits in Agricultural Futures Markets: The Verdict from Daily Firm-level Position Data," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 38(2), pages 292-317.
  • Handle: RePEc:oup:apecpp:v:38:y:2016:i:2:p:292-317.
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    References listed on IDEAS

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    1. Gunther Capelle-Blancard & Dramane Coulibaly, 2011. "Index trading and agricultural commodity prices: A panel Granger causality analysis," International Economics, CEPII research center, issue 126-127, pages 51-71.
    2. repec:cii:cepiei:2011-q2-3-126-127 is not listed on IDEAS
    3. Petzel, Todd E., 1981. "A New Look at Some Old Evidence: The Wheat Market Scandal of 1925," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 18(1), pages 1-12.
    4. 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).
    5. Bahattin Buyuksahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 167-202.
    6. repec:cii:cepiei:2011-q2-3-126-127-4 is not listed on IDEAS
    7. Nicole M. Aulerich & Scott H. Irwin & Philip Garcia, 2014. "Bubbles, Food Prices, and Speculation: Evidence from the CFTC's Daily Large Trader Data Files," NBER Chapters, in: The Economics of Food Price Volatility, pages 211-253, National Bureau of Economic Research, Inc.
    8. Working, Holbrook, 1963. "Futures Markets Under Renewed Attack," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 4(1), pages 1-12.
    9. Will, Matthias Georg & Prehn, Sören & Pies, Ingo & Glauben, Thomas, 2012. "Is financial speculation with agricultural commodities harmful or helpful? A literature review of current empirical research," Discussion Papers 2012-27, Martin Luther University of Halle-Wittenberg, Chair of Economic Ethics.
    10. repec:cii:cepiei:2011-q2-3-126-127-7 is not listed on IDEAS
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