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A Bitter Brew? Futures Speculation and Commodity Prices

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  • Bos Jaap
  • Molen Maarten van der

    (METEOR)

Abstract

We introduce a new approach to measuring the possible impact of futures speculation on spotcommodity prices. We advocate the use of a non-parametric, highly flexible empirical model formeasuring this impact, in order to account for possible non-linearity in the transmission fromfutures to spot market. Empirical results for the coffee market show that most of the changes inspot prices can be attributed to shifts in demand and - in particular - supply. Nevertheless,speculation is an important part of the coffee price generation process. The effect of speculationon the price of coffee is indeed spiky, which explains why traditional, mean-variance basedmethods have failed to identify this. However, it is also significant, both statistically andeconomically. An extensive robustness analysis confirms the validity of our results, and - withinthe limitations posed by the data - we have been able to establish causality.

Suggested Citation

  • Bos Jaap & Molen Maarten van der, 2012. "A Bitter Brew? Futures Speculation and Commodity Prices," Research Memorandum 045, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  • Handle: RePEc:unm:umamet:2012045
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    File URL: https://cris.maastrichtuniversity.nl/portal/files/753202/content
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    References listed on IDEAS

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    1. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
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    1. repec:eee:jrpoli:v:53:y:2017:i:c:p:135-146 is not listed on IDEAS

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    financial economics and financial management ;

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