Speculation in Agricultural Commodity Markets: Implications for Returns and Volatility

Financial speculation on agricultural commodities has been the subject of many academic studies. However, results remain contradictory due to theoretical uncertainties and practical considerations related to the measure of speculation. In this paper, we describe and use various approaches to investigate a large set of seven direct speculation measures on a unified sample of agricultural commodity futures (grains and softs). Using data from 2006 to 2022, we find that speculation, often associated with hedge fund financial institutional behavior, tends to reduce subsequent volatility on many commodities when using speculators' gross exposure proxies, i.e., the Working's T, speculative open interest, and speculative intensity to measure speculation. Other measures are inconclusive. Measurement uncertainty compounds the problem of identifying the impact of speculation on agricultural markets. The negative link between some speculation proxies and subsequent agricultural commodity returns' volatility indicates that regulators should be cautious when attempting to measure speculative behavior and consider rules on speculation and hedge fund limits.