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The impact of long-only index funds on price discovery and market performance in agricultural futures markets

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  • Prehn, Sören
  • Glauben, Thomas
  • Loy, Jens-Peter
  • Pies, Ingo
  • Will, Matthias Georg

Abstract

For a considerable time, long-only index funds have been suspected for being responsible for price increases on agricultural futures markets, particularly those for grain. Utilizing partial equilibrium concepts, we analyze the market impacts of long-only index funds. Our analysis reveals that long-only index funds stabilize the market. The market entry of long-only index funds lowers risk premiums, so farmers can hedge at lower costs. This gives incentives for storage and dampens seasonal price fluctuations on spot markets, which is also in favor of consumers. However, the entry of long-only index funds reduces the profitability of speculation. Thus, there is no need for political action in this particular field.

Suggested Citation

  • Prehn, Sören & Glauben, Thomas & Loy, Jens-Peter & Pies, Ingo & Will, Matthias Georg, 2014. "The impact of long-only index funds on price discovery and market performance in agricultural futures markets," IAMO Discussion Papers 169081, Institute of Agricultural Development in Transition Economies (IAMO).
    • Handle: RePEc:ags:iamodp:169081
    DOI: 10.22004/ag.econ.169081
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    References listed on IDEAS

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    1. J. Frank & P. Garcia, 2009. "Time-varying risk premium: further evidence in agricultural futures markets," Applied Economics, Taylor & Francis Journals, vol. 41(6), pages 715-725.
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    3. Pietz, Matthäus, 2009. "Risk premia in the German electricity futures market," CEFS Working Paper Series 2009-07, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).
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    5. Christopher R. Knittel & Robert S. Pindyck, 2016. "The Simple Economics of Commodity Price Speculation," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(2), pages 85-110, April.
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    7. Dwight R. Sanders & Scott H. Irwin, 2012. "A Reappraisal of Investing in Commodity Futures Markets," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 34(3), pages 515-530.
    8. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
    9. Scott Willenbrock, 2011. "Diversification Return, Portfolio Rebalancing, and the Commodity Return Puzzle," Papers 1109.1256, arXiv.org.
    10. Andrew McKenzie & Matthew Holt, 2002. "Market efficiency in agricultural futures markets," Applied Economics, Taylor & Francis Journals, vol. 34(12), pages 1519-1532.
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    Cited by:

    1. Svanidze, Miranda & Götz, Linde, 2019. "Determinants of spatial market efficiency of grain markets in Russia," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 89, pages 1-10.
    2. Steinhübel, Linda & Prehn, Sören & Brümmer, Bernhard & Pies, Ingo & Will, Matthias Georg, 2017. "The impact of index funds on grain futures markets revisited," 2017 International Congress, August 28-September 1, 2017, Parma, Italy 261428, European Association of Agricultural Economists.

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    More about this item

    Keywords

    Agricultural Finance; Financial Economics;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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