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Examining the Relationship Between Physical Stocks of Commodities and

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  • Sanders, Daniel
  • Alexander, Corinne
  • Roberts, Matthew

Abstract

The price volatility observed in futures markets, beginning in 2006 and continuing through to the present, has posed challenges to commercial traders attempting to use these markets to hedge their price risk. Additionally, speculative activity in these markets is seemingly on the rise, with large index funds drawing the ire of many as a possible driver of price volatility and high price levels. Taken in concert, these issues have led some to question the ability of the markets to continue to provide for adequate hedging functionality. In this paper, we attempt to determine if the rate at which commercial traders hedge in the markets has changed by testing for structural change in the relationship between open interest and physical grain stocks. A significant structural break is found in the wheat market in late 2004. A more detailed examination of the break is done by incorporating smooth transition and threshold models, with the positive relationship between open interest and stocks shown to decline to statistically zero around the structural break. Given the development of non-convergence in the wheat market at this time, it suggests that wheat hedgers might be using alternative hedging outlets. Overall, the estimated models show generally poor fits, indicating that there might be other factors than are present in the structural model influencing hedgers’ positions in futures markets.

Suggested Citation

  • Sanders, Daniel & Alexander, Corinne & Roberts, Matthew, 2011. "Examining the Relationship Between Physical Stocks of Commodities and," 2011 Conference, April 18-19, 2011, St. Louis, Missouri 285348, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:nccc11:285348
    DOI: 10.22004/ag.econ.285348
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    References listed on IDEAS

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    6. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
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