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Does speculation affect spot price levels? the case of metals with and without futures markets

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  • George M. Korniotis

Abstract

This paper finds no evidence that speculative activity in futures markets for industrial metals caused higher spot prices in recent years. The empirical analysis focuses on industrial metals with and without futures contracts and is organized around two key themes. First, I show that the comovement between metals with and without futures contracts has not weakened in recent years as speculative activity has risen. Specifically, the annual and quarterly price growth rates of the two metal categories have been positively correlated with their growth rates experiencing a structural shift by the end of 2002. This comovement is driven by economic fundamentals because world GDP growth is strongly correlated with metal price growth, especially after 2002. The structural change in 2002 is also consistent with supply and demand information found in industry newsletters. In the second set of results, I focus more directly on financial speculation and spot price inflation. I use the S&P Goldman-Sachs Commodity Index returns to proxy for the volume of speculative activity and I show that these returns are unrelated to metal prices. The final test follows storage models, which suggest that speculation can affect spot markets only if it leads to physical hoarding. Focusing on metals with established futures markets, I find no evidence of physical hoarding because inventory growth is found to be negatively correlated with price growth rates.

Suggested Citation

  • George M. Korniotis, 2009. "Does speculation affect spot price levels? the case of metals with and without futures markets," Finance and Economics Discussion Series 2009-29, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2009-29
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    References listed on IDEAS

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    Cited by:

    1. Yao, Wei & Alexiou, Constantinos, 2022. "Exploring the transmission mechanism of speculative and inventory arbitrage activity to commodity price volatility. Novel evidence for the US economy," International Review of Financial Analysis, Elsevier, vol. 80(C).
    2. Miffre, Joëlle & Brooks, Chris, 2013. "Do long-short speculators destabilize commodity futures markets?," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 230-240.
    3. Holmberg, Pär & Willems, Bert, 2015. "Relaxing competition through speculation: Committing to a negative supply slope," Journal of Economic Theory, Elsevier, vol. 159(PA), pages 236-266.

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