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Revealing the impact of index traders on commodity futures markets

Listed author(s):
  • Gabriel Power
  • Calum Turvey

Commodity futures prices and volatility increased dramatically from 2006 to 2008, following a period during which index traders, a class of large investment funds, took on massive commodity futures positions. This article presents a method to reveal the extent to which index trader trading activity (volume) might have caused increases in futures price volatility. This approach is useful when position-level data are incomplete or confidential, as with index trader position data. The method is applied to leading agricultural commodity futures data. The impact of index traders is identified during their period of greatest activity, that is, 2005 to 2006, using aggregated volume data that are filtered using wavelet transforms. The filtering decision rule is guided by the Commodity Futures Trading Commission's (CFTC) finding that index traders do not engage in short-run trades. A joint model of futures (filtered) volume and (unfiltered) price volatility is estimated by 2SLS to account for the endogeneity of prices and volume. As a robustness check, both log-range and GARCH measures of volatility are used. The evidence provides no support for the claim that index traders have increased price volatility for storable commodities (grains/oilseeds) and only weak support in the case of nonstorable commodities (meats).

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Article provided by Taylor & Francis Journals in its journal Applied Economics Letters.

Volume (Year): 18 (2011)
Issue (Month): 7 ()
Pages: 621-626

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Handle: RePEc:taf:apeclt:v:18:y:2011:i:7:p:621-626
DOI: 10.1080/13504851003761848
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