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The Adequacy of Speculation in Agricultural Futures Markets:Too Much of a Good Thing?

  • Sanders, Dwight R.
  • Irwin, Scott H.
  • Merrin, Robert P.

Long-only commodity index funds have been blamed by other futures market participants for inflating commodity prices, increasing market volatility, and distorting historical price relationships. Much of this criticism is leveled without any formal empirical support or even cursory data analyses. The Commodity Futures Trading Commission makes available the positions held by index funds and other large traders in their Commitment’s of Traders report. In this research, we make an initial assessment of the size and activity of index funds in traditional agricultural futures markets. The results suggest that after an initial surge from early 2004 through mid-2005, index fund positions have stabilized as a percent of total open interest. Speculative measures—such as Working’s T—suggest that long-only funds may provide a benefit in markets traditionally dominated by short hedging.

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File URL: http://purl.umn.edu/37615
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Paper provided by NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2008 Conference, April 21-22, 2008, St. Louis, Missouri with number 37615.

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Date of creation: 2008
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Handle: RePEc:ags:nccest:37615
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  1. Wang, Changyun, 2001. "The behavior and performance of major types of futures traders," MPRA Paper 36426, University Library of Munich, Germany, revised Jul 2002.
  2. Richard N. Cooper & Robert Z. Lawrence, 1975. "The 1972-75 Commodity Boom," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(3), pages 671-724.
  3. Sanders, Dwight R. & Irwin, Scott H. & Merrin, Robert P., 2007. "Smart Money? The Forecasting Ability of CFTC Large Traders," 2007 Conference, April 16-17, 2007, Chicago, Illinois 37556, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  4. Hardouvelis, Gikas A & Kim, Dongcheol, 1995. "Price Volatility and Futures Margins," CEPR Discussion Papers 1263, C.E.P.R. Discussion Papers.
  5. Gary Gorton & Fumio Hayashi & K. Rouwenhorst, 2007. "The Fundamentals of Commodity Futures Returns," Yale School of Management Working Papers amz2605, Yale School of Management, revised 01 Oct 2008.
  6. De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990. "Noise Trader Risk in Financial Markets," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 703-38, August.
  7. Trostle, Ronald, 2008. "Factors Contributing to Recent Increases in Food Commodity Prices (PowerPoint)," Seminars 43902, USDA Economists Group.
  8. Gary Gorton & K. Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," Yale School of Management Working Papers amz2619, Yale School of Management, revised 01 Mar 2005.
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