Agricultural price volatility and speculation by commodity index funds: a theoretical analysis

Alexandre Gohin and Jean Cordier

Agricultural Finance Review, 2017, vol. 77, issue 3, 429-444

Abstract: Purpose - The role that speculation in futures markets plays during food price spikes is a subject of lively dispute. This issue is often addressed with empirical analyses. They suffer from data limitations and focus on the short-term impacts. The paper aims to discuss these issues. Design/methodology/approach - The authors develop a theoretical model to explain the behaviour of speculators and producers in futures and cash markets. Compared to the only two theoretical analyses by Vercammen and Doroudian where informational externalities are excluded and by Fisheet al.where production responses are excluded, the authors introduce both informational externalities and lagged production responses. Findings - The authors find that the expanded net long positions of commodity index funds (CIF) are inconsistent with lower stock levels that typically prevail before the price spikes. These positions stimulate production, hence stocks, before the price spikes. Thus they contribute to soften the price volatility. Practical implications - The simulation results indicate that before imposing new regulations on financial markets, such as position limits on index funds, their beneficial medium-term effect as a hedging instrument for commercial participants should not be omitted or underestimated. Originality/value - Because the authors develop a second-best theoretical framework, the authors find that CIF are not a systematic cause of medium-term market swings.

Keywords: Commodity prices; Futures markets; Stocks; Q11; J13 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:afrpps:afr-03-2016-0016

DOI: 10.1108/AFR-03-2016-0016

Access Statistics for this article

Agricultural Finance Review is currently edited by Valentina Hartarska and Denis Nadolnyak

More articles in Agricultural Finance Review from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().