EconPapers    
Economics at your fingertips  
 

Commodity Price Comovement and Financial Speculation: The Case of Cotton

Joseph Janzen (), Aaron Smith and Colin Carter ()

American Journal of Agricultural Economics, 2018, vol. 100, issue 1, 264-285

Abstract: Recent booms and busts in commodity prices have generated concerns that financial speculation causes excessive commodity-price comovement, driving prices away from levels implied by supply and demand under rational expectations. We develop a structural vector autoregression model of a commodity futures market and use it to explain two recent spikes in cotton prices. In doing so, we make two contributions to the literature on commodity price dynamics. First, we estimate the extent to which cotton price booms and busts can be attributed to comovement with other commodities. Finding such comovement would be necessary but would not be sufficient evidence to establish that broad-based financial speculation drives commodity prices. Second, after controlling for aggregate demand and comovement, we develop a new method to point identify shocks to precautionary demand for cotton separately from shocks to current supply and demand. To do so, we use differences in volatility across time implied by the rational expectations competitive storage model. We find limited evidence that financial speculation caused cotton prices to spike in 2008 or 2011. We conclude that the 2008 price spike was driven mostly by precautionary demand for cotton, and the 2011 spike was caused by a net supply shortfall.

Keywords: Commodity prices; index traders; financialization; speculation; cotton; comovement; structural VAR (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1093/ajae/aax052 (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:oup:ajagec:v:100:y:2018:i:1:p:264-285.

Access Statistics for this article

American Journal of Agricultural Economics is currently edited by Madhu Khanna, Brian E. Roe, James Vercammen and JunJie Wu

More articles in American Journal of Agricultural Economics from Agricultural and Applied Economics Association Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().

 
Page updated 2020-09-29
Handle: RePEc:oup:ajagec:v:100:y:2018:i:1:p:264-285.