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Do financial investors affect the price of wheat?

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  • Girardi, Daniele

Abstract

It is widely debated whether financial speculation was a significant force behind recent food price fluctuations. As a matter of fact, during the 2000s agricultural commodity derivatives markets were flooded by a ‘wall of money’ coming from financial investors. In agricultural exchanges, the greatest part of this huge financial inflow came from index traders, i.e. financial actors that follow a passive strategy of tracking a commodity index. In this article I present new empirical evidence that supports the hypothesis that financial investments have affected wheat price dynamics in recent years. In particular, I focus on Hard Red Winter (HRW) wheat. Since 2007 HRW wheat price fluctuations have been positively related to US stock market returns and oil price movements. These correlations appear to be determined by commodity index traders, since both these relationships proved to be spurious, with the most tracked commodity index as the confounding variable.

Suggested Citation

  • Girardi, Daniele, 2012. "Do financial investors affect the price of wheat?," MPRA Paper 40285, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:40285
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    File URL: https://mpra.ub.uni-muenchen.de/40285/1/MPRA_paper_40285.pdf
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    References listed on IDEAS

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    1. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    2. Taehoon Kang & B. Wade Brorsen, 1995. "Conditional heteroskedasticity, asymmetry, and option pricing," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 15(8), pages 901-928, December.
    3. Rafael E. de Hoyos & Denis Medvedev, 2011. "Poverty Effects of Higher Food Prices: A Global Perspective," Review of Development Economics, Wiley Blackwell, vol. 15(3), pages 387-402, August.
    4. Donald W. K. Andrews, 2003. "Tests for Parameter Instability and Structural Change with Unknown Change Point: A Corrigendum," Econometrica, Econometric Society, vol. 71(1), pages 395-397, January.
    5. Seung‐Ryong Yang & B. Wade Brorsen, 1993. "Nonlinear dynamics of daily futures prices: Conditional heteroskedasticity or chaos?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 13(2), pages 175-191, April.
    6. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    7. Parantap Basu & William T. Gavin, 2011. "What explains the growth in commodity derivatives?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 37-48.
    8. Hernandez, Manuel & Torero, Maximo, 2010. "Examining the dynamic relationship between spot and future prices of agricultural commodities," IFPRI discussion papers 988, International Food Policy Research Institute (IFPRI).
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    Cited by:

    1. Nagayev, Ruslan & Masih, Mansur, 2013. "Should Shariah-compliant investors include commodities in their portfolios? New evidence," MPRA Paper 58851, University Library of Munich, Germany.
    2. Czech, Katarzyna, 2013. "Speculation in the agricultural commodity market," Problems of World Agriculture / Problemy Rolnictwa Światowego, Wydział Nauk Ekonomicznych, Uniwersytet Warszawski, vol. 13(28).
    3. Girardi, Daniele, 2012. "A brief essay on the financialization of agricultural commodity markets," MPRA Paper 44771, University Library of Munich, Germany.
    4. Nagayev, Ruslan & Disli, Mustafa & Inghelbrecht, Koen & Ng, Adam, 2016. "On the dynamic links between commodities and Islamic equity," Energy Economics, Elsevier, vol. 58(C), pages 125-140.

    More about this item

    Keywords

    Agricultural Commodity Prices; Financialization; Commodity Futures Markets; Commodity Index Trading;

    JEL classification:

    • Q1 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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