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Limitations of Granger Causality Analysis to assess the price effects from the financialization of agricultural commodity markets under bounded rationality

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  • Grosche, Stephanie

Abstract

Modern agricultural commodity markets are simultaneously governed by a physical and a financial market element. Whether financial “index trading” activity influences price levels on the futures markets has been investigated by empirical studies using Granger Causality Analysis. A critical review of these studies reveals inconclusive results. Based on sensitivities of the method, reasons for limited interpretability of results may be omitted determinants of financial trading activity, failure to consider the informational efficiency of markets, time-varying and feedback effects of boundedly rational heterogeneous trading strategies and limitations in specifying adequate theoretical variables from existing data.

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  • Grosche, Stephanie, 2012. "Limitations of Granger Causality Analysis to assess the price effects from the financialization of agricultural commodity markets under bounded rationality," Discussion Papers 121868, University of Bonn, Institute for Food and Resource Economics.
    • Handle: RePEc:ags:ubfred:121868
    DOI: 10.22004/ag.econ.121868
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    2. Mayer, Herbert & Rathgeber, Andreas & Wanner, Markus, 2017. "Financialization of metal markets: Does futures trading influence spot prices and volatility?," Resources Policy, Elsevier, vol. 53(C), pages 300-316.
    3. Nicole M. Aulerich & Scott H. Irwin & Philip Garcia, 2014. "Bubbles, Food Prices, and Speculation: Evidence from the CFTC's Daily Large Trader Data Files," NBER Chapters, in: The Economics of Food Price Volatility, pages 211-253, National Bureau of Economic Research, Inc.

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    Keywords

    Agricultural and Food Policy; Demand and Price Analysis; Financial Economics;
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