Does speculation affect spot price levels? the case of metals with and without futures markets
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.
|Date of creation:||2009|
|Contact details of provider:|| Postal: 20th Street and Constitution Avenue, NW, Washington, DC 20551|
Web page: http://www.federalreserve.gov/
More information through EDIRC
|Order Information:||Web: http://www.federalreserve.gov/pubs/feds/fedsorder.html|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F & French, Kenneth R, 1988. " Business Cycles and the Behavior of Metals Prices," Journal of Finance, American Finance Association, vol. 43(5), pages 1075-1093, December.
- Martin J. Nielsen & Eduardo S. Schwartz, 2004. "Theory of Storage and the Pricing of Commodity Claims," Review of Derivatives Research, Springer, vol. 7(1), pages 5-24.
- Hansen, Bruce E, 1997.
"Approximate Asymptotic P Values for Structural-Change Tests,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 15(1), pages 60-67, January.
- Bruce E. Hansen, 1995. "Approximate Asymptotic P-Values for Structural Change Tests," Boston College Working Papers in Economics 297., Boston College Department of Economics.
- Bailey, Warren & Chang, K C, 1993. " Macroeconomic Influences and the Variability of the Commodity Futures Basis," Journal of Finance, American Finance Association, vol. 48(2), pages 555-573, June.
- Hansen, Bruce E., 2000.
"Testing for structural change in conditional models,"
Journal of Econometrics,
Elsevier, vol. 97(1), pages 93-115, July.
- Andrews, Donald W K & Ploberger, Werner, 1994. "Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative," Econometrica, Econometric Society, vol. 62(6), pages 1383-1414, November.
- Bruce E. Hansen, 1998. "Testing for Structural Change in Conditional Models," Boston College Working Papers in Economics 310., Boston College Department of Economics.
- Tom Doan, "undated". "REGHBREAK: RATS procedure to perform structural break test with bootstrapped p-values," Statistical Software Components RTS00176, Boston College Department of Economics.
- Tom Doan, "undated". "RATS programs to replicate structural break test with Hansen's fixed regressor bootstrap," Statistical Software Components RTZ00089, Boston College Department of Economics.
- Andrews, Donald W K & Ploberger, Werner, 1994.
"Optimal Tests When a Nuisance Parameter Is Present Only under the Alternative,"
Econometric Society, vol. 62(6), pages 1383-1414, November.
- Donald W.K. Andrews & Werner Ploberger, 1992. "Optimal Tests When a Nuisance Parameter Is Present Only Under the Alternative," Cowles Foundation Discussion Papers 1015, Cowles Foundation for Research in Economics, Yale University.
- 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.
- Robert S. Pindyck, 2001. "The Dynamics of Commodity Spot and Futures Markets: A Primer," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 1-30.