Rational destabilization in commodity markets

David Batista Soares and Etienne Borocco

Journal of Commodity Markets, 2022, vol. 25, issue C

Abstract: This article tackles the issue of rational destabilization in the commodity markets. The theoretical framework is a three-period model with futures positions revised within the intermediate holding period of the spot market. Technical traders enter the market in the intermediate period. The model outcome is a multiplicity of equilibria that are a source of instability. We show that the risk management of the rising weight of technical trading generates a higher variability in spot prices and damages long hedging. Furthermore, this article highlights caveats about the empirical measures of hedging pressure and excessive speculation that can be biased.

Keywords: Equilibrium model; Commodity; Speculation; Technical trading; Futures markets (search for similar items in EconPapers)
JEL-codes: D4 G13 Q02 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:25:y:2022:i:c:s2405851321000246

DOI: 10.1016/j.jcomm.2021.100190

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