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Bubbles, Food Prices, and Speculation: Evidence from the CFTC's Daily Large Trader Data Files

In: The Economics of Food Price Volatility

  • Nicole M. Aulerich
  • Scott H. Irwin
  • Philip Garcia

The "Masters Hypothesis" is the claim that unprecedented buying pressure from new financial index investors created a massive bubble in agricultural futures prices at various times in recent years. This paper analyzes the market impact of financial index investment in agricultural futures markets using non-public data from the Large Trader Reporting System (LTRS) maintained by the U.S. Commodity Futures Trading Commission (CFTC). The LTRS data are superior to publicly-available data because commodity index trader (CIT) positions are available on a daily basis, positions are disaggregated by contract maturity, and positions before 2006 can be reliably estimated. Bivariate Granger causality tests use CIT positions in terms of both the change in aggregate new net flows into index investments and the rolling of existing index positions from one contract to another. The null hypothesis of no impact of aggregate CIT positions on daily returns is rejected in only 3 of the 12 markets. Point estimates of the cumulative impact of a one standard deviation increase in CIT positions on daily returns are negative and very small, averaging only about two basis points. The null hypothesis that CIT positions do not impact daily returns in a data-defined roll period is rejected in 5 of the 12 markets and estimated cumulative impacts are negative in all 12 markets; the opposite of the expected outcome if CIT rolling activity simultaneously pressures nearby prices downward and first deferred prices upward. Overall, the results add to the growing body of literature showing that buying pressure from financial index investment in recent years did not cause massive bubbles in agricultural futures prices.

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This chapter was published in:
  • Jean-Paul Chavas & David Hummels & Brian D. Wright, 2014. "The Economics of Food Price Volatility," NBER Books, National Bureau of Economic Research, Inc, number chav12-1.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12814.
    Handle: RePEc:nbr:nberch:12814
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
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    1. Celso Brunetti & David Reiffen, 2011. "Commodity index trading and hedging costs," Finance and Economics Discussion Series 2011-57, Board of Governors of the Federal Reserve System (U.S.).
    2. Gunther Capelle-Blancard & Dramane Coulibaly, 2011. "Index Trading and Agricultural Commodity Prices: A Panel Granger Causality Analysis," Working Papers 2011-28, CEPII research center.
    3. Bassam Fattouh, Lutz Kilian, and Lavan Mahadeva, 2013. "The Role of Speculation in Oil Markets: What Have We Learned So Far?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    4. Erkko Etula, 2009. "Broker-dealer risk appetite and commodity returns," Staff Reports 406, Federal Reserve Bank of New York.
    5. Bellemare, Marc F., 2011. "Rising food prices, food price volatility, and political unrest," MPRA Paper 31888, University Library of Munich, Germany.
    6. Robles, Miguel & Torero, Maximo & von Braun, Joachim, 2009. "When speculation matters:," Issue briefs 57, International Food Policy Research Institute (IFPRI).
    7. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    8. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    9. Ing-Haw Cheng & Andrei Kirilenko & Wei Xiong, 2012. "Convective Risk Flows in Commodity Futures Markets," NBER Working Papers 17921, National Bureau of Economic Research, Inc.
    10. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
    11. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425.
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