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The role of fundamentals and financialisation in recent commodity price developments: An empirical analysis for wheat, coffee, cotton, and oil

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  • Ederer, Stefan
  • Heumesser, Christine
  • Staritz, Cornelia

Abstract

In the context of recent commodity price hikes, the financialisation of commodity derivative markets, reflected in the increased presence of financial investors and new financial products such as commodity index and exchange traded funds has been controversially discussed. Many studies focus on the effect of passive index investors on rising commodity prices, but hardly look at the effect of the diverse group of money managers where an important share engages in technical and trend following trading strategies and thus has the potential to push prices up and down. This is problematic given the increased importance of money managers and more generally of active trading strategies in recent years. We analyze for the commodities coffee, cotton, soft red winter and hard red winter wheat and WTI and Brent crude oil the effect of both types of financial investors within a Vector Autoregressive (VAR) model framework, conducting Granger (non-)causality tests and impulse response analyses for the period June 2006 to October 2012. We complement the bivariate model approach, which looks at the lead-lag relationship between financial investors' positions and commodity returns, with a multivariate approach. We thus assess financial investors' positions in addition to a range of fundamental and macroeconomic variables which may influence commodity prices. In both models, index investors' net long positions are not found to have a significant effect on commodity returns in recent years. In the multivariate model money managers' net long positions have a statistically significant and large effect on returns for all commodities; in the bivariate model they only have an effect for coffee. In the bivariate model, we also find that commodity returns drive money managers' positions, which may indicate the presence of trend following trading strategies. Overall, our results support the hypothesis of financialisation of commodity derivative markets.

Suggested Citation

  • Ederer, Stefan & Heumesser, Christine & Staritz, Cornelia, 2013. "The role of fundamentals and financialisation in recent commodity price developments: An empirical analysis for wheat, coffee, cotton, and oil," Working Papers 42, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
  • Handle: RePEc:zbw:oefsew:42
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    Cited by:

    1. Staritz, Cornelia & Tröster, Bernhard & Küblböck, Karin, 2015. "Managing commodity price risks: The cases of cotton in Burkina Faso and Mozambique and coffee in Ethiopia," Policy Notes 16/2015, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    2. Staritz, Cornelia & Küblböck, Karin, 2013. "Re-regulation of commodity derivative markets: Critical assessment of current reform proposals in the EU and the US," Working Papers 45, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    3. Staritz, Cornelia & Newman, Susan & Tröster, Bernhard & Plank, Leonhard, 2015. "Financialization, price risks, and global commodity chains: Distributional implications on cotton sectors in Sub-Saharan Africa," Working Papers 55, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    4. Michael Hachula & Malte Rieth, 2015. "Finanzspekulation und Rohstoffpreise," DIW Roundup: Politik im Fokus 63, DIW Berlin, German Institute for Economic Research.
    5. Von Arnim, Rudi & Tröster, Bernhard & Staritz, Cornelia & Raza, Werner, 2015. "Commodity dependence and price volatility in least developed countries: A structuralist computable general equilibrium model with applications to Burkina Faso, Ethiopia and Mozambique," Working Papers 52, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    6. Staritz, Cornelia & Heumesser, Christine & Küblböck, Karin, 2013. "Commodity prices, financial markets, and development: Effects of the financialisation of commodity markets and necessary policy reforms," Policy Notes 09/2013, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    7. Cornelia Staritz & Susan Newman & Bernhard Tröster & Leonhard Plank, 2015. "Financialisation, price risks, and global commodity chains: Distributional implications on Cotton Sectors in Sub-Saharan Africa," Working Papers 2015/04, Maastricht School of Management.
    8. Staritz, Cornelia & Tröster, Bernhard, 2015. "Cotton-based development in Sub-Saharan Africa? Global commodity chains, national market structure and development outcomes in Burkina Faso, Mozambique and Tanzania," Working Papers 54, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    9. Michael Hachula & Malte Rieth, 2017. "Identifying Speculative Demand Shocks in Commodity Futures Markets through Changes in Volatility," Discussion Papers of DIW Berlin 1646, DIW Berlin, German Institute for Economic Research.
    10. Tröster, Bernhard, 2015. "Global commodity chains, financial markets, and local market structures: Price risks in the coffee sector in Ethiopia," Working Papers 56, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.

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