Index Trading and Agricultural Commodity Prices: A Panel Granger Causality Analysis

CEPII Working Paper No. 2011–28

25 Pages Posted: 5 Jan 2012

See all articles by Gunther Capelle-Blancard

Gunther Capelle-Blancard

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES); PSB Paris School of Business

Dramane Coulibaly

Université Paris X Nanterre; Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

Date Written: January 5, 2012

Abstract

Since the 2008 global food crisis, and with the new price surge in 2010-2011, agricultural commodity markets have been at the heart of the world economic concerns. It is likely that several fundamental factors (crop failures, extreme weather events, biofuel development, emerging economies growth, monetary instability) have played a role, but there are also reasons to suspect that financial markets could have been partly responsible for the price increase. Indeed, at the same time prices of commodities rose substantially, financial investments in agricultural commodities soared. This increase was mainly driven by index-based investments, that led to the 'financialization' of agricultural commodity markets.

Several studies have examined the causality between commodity prices and positions on futures markets. Overall, they generate no evidence that index trading had an impact on price changes (see Irwin and Sanders (2011) for a survey). However, as stated by Sanders and Irwin (2011b), the power of the standard statistical tests might be too low. Accordingly, they suggest to consider SUR estimations to take cross-sectional dependence across markets into account. In this paper, we aim to contribute to the literature by using the panel Granger causality testing approach recently developed by Kònya (2006). More precisely, we consider SUR estimation and bootstrap specific critical values. This approach does not suppose homogeneity in the panel and does not require preliminary tests for unit roots and cointegration.

Our causality tests are applied to the relationship between index-based positions and futures prices on weekly data for twelve grain, livestock and other soft commodity markets (cocoa, coffee, corn, cotton, feeder cattle, live cattle, lean hogs, soybeans, soybean oil, sugar, wheat-CBOT and wheat-KCBT) over the period 2006-2010. Our results confirm the absence of direct effect between index-based trading and commodity prices.

Keywords: speculation, financialization, food crisis, soft commodities, index funds, panel granger causality

JEL Classification: G10, Q10

Suggested Citation

Capelle-Blancard, Gunther and Coulibaly, Dramane, Index Trading and Agricultural Commodity Prices: A Panel Granger Causality Analysis (January 5, 2012). CEPII Working Paper No. 2011–28. Available at SSRN: https://ssrn.com/abstract=1980058 or http://dx.doi.org/10.2139/ssrn.1980058

Gunther Capelle-Blancard (Contact Author)

Université Paris I Panthéon-Sorbonne - Centre d'Economie de la Sorbonne (CES) ( email )

106-112 Boulevard de l'hopital
106-112 Boulevard de l'Hôpital
Paris Cedex 13, 75647
France

PSB Paris School of Business ( email )

59 rue Nationale
Paris, 75013
France

Dramane Coulibaly

Université Paris X Nanterre ( email )

92, av. de la République, Nanterre
Room G301, Building G
Paris, Nanterre Cedex 92001
France

Centre d'Etudes Prospectives et d'Info. Internationales (CEPII)

France

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