IDEAS home Printed from https://ideas.repec.org/p/ags/n13415/285837.html

Bubbles, Froth, and Facts: What Evidence is there to Support the Masters Hypothesis?

Author

Listed:
  • Sanders, Dwight R.
  • Irwin, Scott H.

Abstract

The Masters Hypothesis is the assertion that large investment inflows into long-only commodity index funds pushed prices far above fundamental value. In particular, the architect of the hypothesis—Michael Masters—suggests that long-only index funds were the cause of a massive increase in commodity prices that culminated in mid-2008. Since that time, there has been a veritable explosion in empirical research on commodity market bubbles and the Masters Hypothesis. In this research we carefully dissect the typology of this literature with particular care given to the distinction between financialization impacts and actual bubble impacts. After carefully defining the characteristics of a Masters-like bubble, simple empirical tests are conducted on the 12 agricultural markets included in the CFTC’s Supplemental Commitments of Traders data base. Price behavior consistent with the Masters Hypothesis is surprisingly difficult to find in the data. This is an important finding given the on-going policy debate and regulations proposed to limit speculative positions in these markets.

Suggested Citation

  • Sanders, Dwight R. & Irwin, Scott H., 2015. "Bubbles, Froth, and Facts: What Evidence is there to Support the Masters Hypothesis?," 2015 Conference, April 20-21, 2015, St. Louis, Missouri 285837, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:n13415:285837
    DOI: 10.22004/ag.econ.285837
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/285837/files/Sanders_Irwin_NCCC_134_2015.pdf
    Download Restriction: no
    File URL: https://libkey.io/10.22004/ag.econ.285837?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Scott H. Irwin, 2013. "Commodity index investment and food prices: does the “Masters Hypothesis” explain recent price spikes?," Agricultural Economics, International Association of Agricultural Economists, vol. 44(s1), pages 29-41, November.
    2. Bahattin Büyükşahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, , vol. 32(2), pages 167-202, April.
    3. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 44(3), pages 1-26, August.
    4. Ke Tang & Wei Xiong, 2012. "Index Investment and the Financialization of Commodities," Financial Analysts Journal, Taylor & Francis Journals, vol. 68(6), pages 54-74, November.
    5. Hamilton, James D. & Wu, Jing Cynthia, 2014. "Risk premia in crude oil futures prices," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 9-37.
    6. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    7. Dwight R. Sanders & Scott H. Irwin, 2011. "New Evidence on the Impact of Index Funds in U.S. Grain Futures Markets," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 59(4), pages 519-532, December.
    8. Christopher L. Gilbert & Simone Pfuderer, 2014. "The Role of Index Trading in Price Formation in the Grains and Oilseeds Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 65(2), pages 303-322, June.
    9. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 187-205, February.
    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. repec:aen:journl:ej34-3-05 is not listed on IDEAS
    12. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 187-205, February.
    13. Admati, Anat R & Pfleiderer, Paul, 1991. "Sunshine Trading and Financial Market Equilibrium," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 443-481.
    14. 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.
    15. repec:aen:journl:2011v32-02-a07 is not listed on IDEAS
    16. repec:cii:cepiei:2011-q2-3-126-127-4 is not listed on IDEAS
    17. 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.
    18. Dwight R. Sanders & Scott H. Irwin, 2013. "Measuring Index Investment in Commodity Futures Markets," The Energy Journal, , vol. 34(3), pages 105-127, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sanders, Dwight R. & Irwin, Scott H., 2014. "Energy futures prices and commodity index investment: New evidence from firm-level position data," Energy Economics, Elsevier, vol. 46(S1), pages 57-68.
    2. Haase, Marco & Seiler Zimmermann, Yvonne & Zimmermann, Heinz, 2016. "The impact of speculation on commodity futures markets – A review of the findings of 100 empirical studies," Journal of Commodity Markets, Elsevier, vol. 3(1), pages 1-15.
    3. Sanders, Dwight R. & Irwin, Scott H., 2014. "The ‘Necessity’ of New Position Limits in Agricultural Futures Markets:," 2014 Conference, April 21-22, 2014, St. Louis, Missouri 285813, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    4. Yan, Lei & Irwin, Scott H., 2016. "Identifying the Impact of Financialization on Commodity Futures Prices," 2016 Conference, April 18-19, 2016, St. Louis, Missouri 285846, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    5. DeCoste, Joseph, 2025. "Does excess futures market demand affect the spot price of oil?," Energy Economics, Elsevier, vol. 149(C).
    6. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.
    7. Yao, Wei, 2025. "The US Quantitative Easing Monetary Policy and Commodities’ Prices," Other publications TiSEM 185d14d3-9dc2-4276-82ec-e, Tilburg University, School of Economics and Management.
    8. Dwight R. Sanders & Scott H. Irwin, 2017. "Bubbles, Froth and Facts: Another Look at the Masters Hypothesis in Commodity Futures Markets," Journal of Agricultural Economics, Wiley Blackwell, vol. 68(2), pages 345-365, June.
    9. Irwin, Scott H., 2020. "Trilogy for troubleshooting convergence: Manipulation, structural imbalance, and storage rates," Journal of Commodity Markets, Elsevier, vol. 17(C).
    10. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., 2018. "Mapping algorithms, agricultural futures, and the relationship between commodity investment flows and crude oil futures prices," Energy Economics, Elsevier, vol. 72(C), pages 486-504.
    11. Chincarini, Ludwig B. & Moneta, Fabio, 2021. "The challenges of oil investing: Contango and the financialization of commodities," Energy Economics, Elsevier, vol. 102(C).
    12. Michael Hachula & Malte Rieth, 2020. "Estimating the Impact of Financial Investments on Agricultural Futures Prices using Changes in Volatility," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(3), pages 759-785, May.
    13. van Huellen, Sophie, 2020. "Too much of a good thing? Speculative effects on commodity futures curves," Journal of Financial Markets, Elsevier, vol. 47(C).
    14. Wimmer, Thomas & Geyer-Klingeberg, Jerome & Hütter, Marie & Schmid, Florian & Rathgeber, Andreas, 2021. "The impact of speculation on commodity prices: A Meta-Granger analysis," Journal of Commodity Markets, Elsevier, vol. 22(C).
    15. Quanbiao Shang & Mindy Mallory & Philip Garcia, 2018. "The components of the bid†ask spread: Evidence from the corn futures market," Agricultural Economics, International Association of Agricultural Economists, vol. 49(3), pages 381-393, May.
    16. Christopher L. Gilbert, 2018. "Investor sentiment and market fundamentals: the impact of index investment on energy and metals markets," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 31(1), pages 87-102, May.
    17. Isleimeyyeh, Mohammad, 2025. "Financial investors and cross-commodity markets integration," Journal of Commodity Markets, Elsevier, vol. 38(C).
    18. Burns, Christopher B. & Prager, Daniel L., 2024. "Do agricultural swaps co-move with equity markets? Evidence from the COVID-19 crisis," Journal of Commodity Markets, Elsevier, vol. 34(C).
    19. Leila Dagher & Ibrahim Jamali & Nasser Badra, 2020. "The Predictive Power of Oil and Commodity Prices for Equity Markets," World Scientific Book Chapters, in: Stéphane Goutte & Khaled Guesmi (ed.), Risk Factors and Contagion in Commodity Markets and Stocks Markets, chapter 3, pages 47-82, World Scientific Publishing Co. Pte. Ltd..
    20. Michael Hachula & Malte Rieth, 2017. "Identifying Speculative Demand Shocks in Commodity Futures Markets through Changes in Volatility," Discussion Papers of DIW Berlin 1646, DIW Berlin, German Institute for Economic Research.

    More about this item

    Keywords

    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:n13415:285837. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: http://www.farmdoc.illinois.edu/nccc134/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.