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Price dynamics and financialization effects in corn futures markets with heterogeneous traders

Stephanie Grosche and Thomas Heckelei

No 172077, Discussion Papers from University of Bonn, Institute for Food and Resource Economics

Abstract: Presumed portfolio benefits of commodities and the availability of index fund-type investment products increase attractiveness of commodity markets for financial traders. But resulting “index trading” strategies are suspected to inflate commodity prices above their fundamental value. We use a Heterogeneous Agent Model for the corn futures market, which can depict price dynamics from the interaction of fundamentalist commercial traders and chartist speculators, and estimate its parameters with the Method of Simulated Moments. In a scenario-based approach, we introduce index funds and simulate price effects from their inclusion in financial portfolio strategies. Results show that the additional long-only trading volume on the market does not inflate price levels but increases return volatility.

Keywords: Agricultural and Food Policy; Agricultural Finance; Financial Economics; Research Methods/ Statistical Methods (search for similar items in EconPapers)
Pages: 38
Date: 2014-06-07
New Economics Papers: this item is included in nep-agr, nep-cmp and nep-mst
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ubfred:172077

DOI: 10.22004/ag.econ.172077

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