The Financialization of Commodity Futures Markets or: How I Learned to Stop Worrying and Love the Index Funds

Abstract

Many believe that index fund investment was the main driver of the 2007-2008 spike in commodity futures prices. One group of empirical studies finds evidence that commodity index investment directly or indirectly had a substantial impact on commodity futures prices. However, the data and methods used in these studies are subject to a number of important criticisms that limit the degree of confidence one can place in the results. Another group of studies provide no systematic evidence of a relationship between on- and off-exchange positions of index funds and the level of commodity futures prices. Overall, the evidence implies that index funds did not harm price discovery in commodity futures markets.

Keywords: Index Funds, Commodity, Futures Markets, Prices, Speculation, Bubble

JEL Classification: D84, G12, G13, G14, Q13, Q41