Commodity Returns and Their Volatility in Relation to Speculation: A Consistent Empirical Approach

Abstract

Granger causality (GC) tests are widely used when it comes to empirically address the dynamic relationship between speculative activities and pricing on commodity markets. However, the sheer number of studies and their heterogeneity makes it extremely difficult – if not impossible – to compare their results and to derive meaningful conclusions. This is the main objective of this paper, which analyzes a consistent dataset with a homogeneous estimation approach. We analyze futures returns and volatilities of 28 commodities for three maturities, from January 2006 to March 2015, in relation to three speculation proxies. Overall, we find a larger number of significant GC effects for volatilities than for returns. The volatility effect is mostly negative, i.e. more speculation is followed by lower volatilities. This is particularly true if the Working index used as speculation proxy. The majority of destabilizing effects (positive relations) if any, is found in livestock. However, no such effects seem to be present in typical agricultural commodities. Mixed evidence is found for softs. Apart from statistical significance, the explained variance of returns and volatilities is below 8% and therefore economically small or at best moderate.

Keywords: Speculation, commodity futures prices, lead-lag relationships

JEL Classification: C32, G13, Q11, Q41