A Bitter Brew? Futures Speculation and Commodity Prices

68 Pages Posted: 31 Jan 2013

See all articles by Jaap W.B. Bos

Jaap W.B. Bos

Maastricht University

Maarten van der Molen

Rabobank International, Netherlands

Date Written: August 29, 2012

Abstract

We introduce a new approach to measuring the possible impact of futures speculation on spot commodity prices. We advocate the use of a non-parametric, highly flexible empirical model for measuring this impact, in order to account for possible non-linearity in the transmission from futures to spot market. Empirical results for the coffee market show that most of the changes in spot prices can be attributed to shifts in demand and - in particular - supply. Nevertheless, speculation is an impor- tant part of the coffee price generation process. The effect of speculation on the price of coffee is indeed spiky, which explains why traditional, mean-variance based methods have failed to identify this. However, it is also significant, both statistically and economically. An extensive robustness analysis confirms the validity of our results, and - within the limitations posed by the data - we have been able to establish causality.

Keywords: Commodities; index funds; speculation; efficiency

JEL Classification: C14, D20, G13

Suggested Citation

Bos, Jaap W.B. and van der Molen, Maarten, A Bitter Brew? Futures Speculation and Commodity Prices (August 29, 2012). Available at SSRN: https://ssrn.com/abstract=2209706 or http://dx.doi.org/10.2139/ssrn.2209706

Jaap W.B. Bos (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, Limburg 6200MD
Netherlands

Maarten Van der Molen

Rabobank International, Netherlands ( email )

Utrecht 3500 HG
Netherlands

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