COMMODITY INDEX FUNDS AND PRICE SWINGS: CONDITIONS OF CAUSALITY

Alexandre Gohin and Jean Cordier

No 91283, 2010: Climate Change in World Agriculture: Mitigation, Adaptation, Trade and Food Security, June 2010, Stuttgart-Hohenheim, Germany from International Agricultural Trade Research Consortium

Abstract: The role played by “speculators” during the 2007/08 food price spike is lively disputed. Our analysis focuses on the increasing participation of index funds in agricultural commodity futures markets before the food price spike. Our central theme is to determine if their prespike massive entry does prepare the subsequent crisis by maintaining low stock levels. We develop a theoretical model explaining the behaviour of speculators and traders on futures and cash markets. We allow index funds to inflict an informational externality on commercial traders that is supposed to induce a lower desire to hold stock. We find out that, once the production decisions of commercial traders are taken into account into the model, the increased net long position of index funds is inconsistent with lower stocks. We therefore conclude that commodity index funds are not a systematic cause of high market swings and that other relevant causes should be further studied.

Keywords: Food Consumption/Nutrition/Food Safety; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 19
Date: 2010
New Economics Papers: this item is included in nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:ags:iatr10:91283

DOI: 10.22004/ag.econ.91283

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