The Effect of Futures Markets on the Stability of Commodity Prices

Johan de Jong, Joep Sonnemans () and Jan Tuinstra

No 19-028/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Do futures markets have a stabilizing or destabilizing effect on commodity prices? Empirical evidence is inconclusive. We try to resolve this question by means of a learning-to-forecast experiment in which a futures market and a spot market are coupled. The spot market exhibits negative feedback between forecasts and prices, while the futures market is of the positive feedback type, which makes it susceptible to bubbles and crashes. We show that the effect of a futures market on spot price stability changes non-monotonically with the strength of the coupling between the spot and futures markets. This coupling depends positively on the number of speculators on the futures market and negatively on storage costs, speculator risk aversion, and the volatility of futures prices. In the end we observe a stabilizing effect on spot prices for weakly coupled markets and a destabilizing effect when the coupling with the futures market is strong.

Keywords: Price stability; expectations feedback; commodity futures markets; experimental economics (search for similar items in EconPapers)
JEL-codes: D84 G13 G41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/19028.pdf (application/pdf)

Related works:
Journal Article: The effect of futures markets on the stability of commodity prices (2022)
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:tin:wpaper:20190028

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().