A speculative bubble in commodity futures prices? Cross-sectional evidence (original) (raw)
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Effects of index-fund investing on commodity futures prices
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Commodity index trader position data are examined for the years prior to the 2007-08 commodity price increase. New data from 2004 to 2005 show that a large increase in commodity index positions occurred in select grain futures markets. However, the increased index participation took place well in advance of the 2007-08 boom in prices. Granger causality tests fail to find any causal link between commodity index activity and grain futures prices. Furthermore, there is little evidence of an index-induced price bubble using long-horizon regressions. Nous avons analysé les données sur les positions des opérateurs de marché au cours des années qui ont précédé la hausse des prix des denrées en 2007-08. Selon de nouvelles données pour la période 2004-05, une hausse substantielle des positions liéesà l'indice des denrées est survenue sur des marchés de grainà terme sélectionnés. Toutefois, cette hausse des positions est survenue bien avant la montrée en flèche des cours en 2007-08. Le test de causalité de Granger n'a pas permis d'établir l'existence d'un lien de causalité entre l'activité liéeà l'indice des denrées et les coursà terme des grains. De plus, les régressions pour processusà mémoire longue ne permettent pas de conclureà l'existence d'une bulle des prix induite par l'indice.
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Some market participants and policy-makers believe that index fund investment was a major driver of the 2007-2008 spike in commodity futures prices. One group of empirical studies does find evidence that commodity index investment had an impact on the level of futures prices. However, the data and methods used in these studies are subject to criticisms that limit the confidence one can place in their results. Moreover, another group of studies provides no systematic evidence of a relationship between positions of index funds and the level of commodity futures prices. The lack of a direct empirical link between index fund trading and commodity futures prices casts considerable doubt on the belief that index funds fueled a price bubble.
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source of liquidity and risk-absorption capacity at a time when both are in high demand. More ominously, tighter position limits on speculation in commodity futures markets combined with the removal of hedge exemptions could force commodity index funds into cash markets, where truly chaotic results could follow. The net result is that moves to tighten regulations on index funds are likely to make commodity futures markets less efficient mechanisms for transferring risk from parties who don't want to bear it to those that do, creating added costs that ultimately are passed back to producers in the form of lower prices and to consumers as higher prices.
For a considerable time, long-only index funds have been suspected of being responsible for price increases on agricultural futures markets, particularly those for grain. Utilitzing market diagrams, we analyze the market impacts of long-only index funds. Our Analysis reveals that long-only index funds stabilize the market. The market entry of long-only index funds lowers risk premiums, so farmers can hedge at lower costs. This gives incentives for storage and dampens seasonal price fluctuations on spot markets, which is also in favor of consumers. However, the entry of long-only index funds reduces the profitability of speculation. Thus, there is no need for political action in this particular field
The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?
The objective of this report is to re-visit the "adequacy speculation " debate in agricultural futures markets. The Commodity Futures Trading Commission makes available the positions held by index funds and other large traders in their Commitment of Traders reports. The results suggest that after an initial surge from early 2004 through mid-2005, index fund positions have stabilized as a percent of total open interest. Traditional speculative measures do not show any material changes or shifts over the sample period. In most markets, the increase in long speculative positions was equaled or surpassed by an increase in short hedging. So, even after adjusting speculative indices for index fund positions, values are within the historical ranges reported in prior research. One implication is that long-only index funds may be beneficial in markets traditionally dominated by short hedging. Attempts to curb speculation through regulatory means should be weighed carefully against the potential benefits provided by this class of speculators.
International Journal of Health Services, 2012
In December 2010, the United Nations Food and Agriculture Organization's Food Price Index surpassed its previous peak of June 2008, and prices remained at this level through September 2011. This pattern is creating justified fears of a renewal or intensification of the global food crisis. This paper reviews arguments and evidence to inform debates on how to regulate commodity futures markets in the face of such price volatility and sustained high prices. We focus on the relationship between market liquidity and price patterns in asset markets in general and in commodities futures markets in particular, as well as the relationship between spot and futures market prices for food. We find strong evidence supporting the need to limit huge increases in trading volume on futures markets through regulations. We find that arguments opposing regulation are not supported. We find no support for the claim that liquidity in futures markets stabilizes prices at “fundamental” values or that s...
Food prices and agricultural futures markets: A literature review
This paper analyses the literature on the large inflow of speculative capital by for instance index-funds on agriculture futures markets and the impact of these flows on peaks in food prices of 2006-2011. We first provide information about the capital flows on futures markets for agricultural commodities. We review 41 studies, both quantitative and qualitative studies and opinion pieces. The studies were summarised on contents, as well as judged on quality. We find that there is no consistent evidence in the academic literature that the large inflow of speculative capital by, amongst others, index funds has led to higher prices or more volatility on the mid to long term. There is evidence that large-scale speculation by index funds has led to very small and short-term volatility. This volatility will not so much have implications for companies and producers that trade agricultural commodities, because the physical prices are not being influenced, but this volatility may have a disto...
Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)
It is commonly asserted that speculative buying by index funds in commodity futures and over-the-counter (OTC) derivatives markets created a “bubble” in commodity prices, with the result that prices, and crude oil prices, in particular, far exceeded fundamental values at the peak. The purpose of this paper is to show that the bubble argument simply does not withstand close scrutiny. Four main points are explored. First, the arguments of bubble proponents are conceptually flawed and reflect fundamental and basic misunderstandings of how commodity futures markets actually work. Second, a number of facts about the current situation in commodity markets are inconsistent with the existence of a substantial bubble in commodity prices. Third, available statistical evidence does not indicate that positions for any group in commodity futures markets, including long-only index funds, consistently lead futures price changes. Fourth, there is a historical pattern of attacks upon speculation during periods of market volatility.