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Empirical Economics

Erschienen in:

09.01.2018

Permanent and transitory price shocks in commodity futures markets and their relation to speculation

verfasst von: Marco Haase, Yvonne Seiler Zimmermann, Heinz Zimmermann

Erschienen in: Empirical Economics | Ausgabe 4/2019

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Abstract

This paper takes an innovative look at the relationship between commodity futures prices and speculation. Contrary to other studies, we analyze the effect of speculation on temporary and permanent futures price shocks estimated from a cointegrated system of pairwise short- and long-dated contracts. Where cointegration is found, the long-term equilibrium is determined by the long-dated contract, while the adjustment toward equilibrium is restored by the short-dated contract (except for cotton). Granger causality tests cannot reject the null hypothesis that speculation as measured by Working’s T index has no effect on squared permanent price shocks for 7 out of 9 commodities. Where the null hypothesis is rejected, the relationship exhibits a negative sign, i.e., speculation has a stabilizing effect.

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A representative discussion of these issues can be found in Fröchtling (1909) or Schliep (1912).

The most advanced statistical analysis of grain prices surrounding the Berlin prohibition was applied by Hooker (1901), a forerunner of modern time series analysis.

Actually, the position data used in the literature and in this study do not classify speculative and hedging positions, but commercial and non-commercial (and more recently: index) positions.

As discussed below, with the recent availability of data from the disaggregated data available from CFCT’s large trader reporting system (LTRS), future studies should be able to analyze the maturity breakdown of speculative positions and to address this point directly.

Commodity futures prices are non-stationary, which are empirically validated for the price series used in our tests.

An alternative explanation could be found in Friedman-style speculation effects pushing short-run asset prices to long-run fundamental values; see Friedman (1953). However, since we do not address questions related to long-run fundamental price determination in this paper, intertemporal arbitrage seems to be a more adequate framework for motivating cointegration of long- and short-dated futures prices.

The motivation for using squared shocks is given in Sect. 4.2 and has to do with the interpretation of the Working’s T index.

See Till (2011), Gilbert (2010), Hailu and Weersink (2010), Irwin and Sanders (2011), Hamilton (2009), and others. Jacks (2007) reviews the speculation debate in historical perspective, in particular the “ban” of futures trading in Germany at the end of the 19th century.

Some 95% of the index funds replicate the SP-GSCI or the DJ-UBS indices.

Weekly statistics on disaggregated long/short positions on 12 agricultural futures positions by index traders, commercial traders, and non-commercial traders are published in the “Commodity Index Traders” (CIT) report by the CFTC. Tang and Xiong (2010) report an average relative share of 28.4% in the long and 1.6% in the short positions relative to the total open interest across all commodities (Table 2). However, as discussed below, the amount of index trading itself is not a relevant indicator of net speculation.

See the U.S. Senate Permanent Subcommittee on Investigations in its examination of Chicago Board of Trade’s (CBOT) wheat futures trading, released on June 23, 2009. The report concludes that the activities of commodity index traders, in the aggregate, constituted excessive speculation in the wheat market under the Commodity Exchange Act.

A detailed discussion and critical assessment of many popular arguments about the destabilizing effect speculation are provided by Irwin et al. (2009).

See Stoll and Whaley (2010), Irwin et al. (2009), and Fig. 1 in Fattouh et al. (2012).

The reports include information about open futures positions of five trader categories: large non-commercials (speculators), large commercials (hedgers), large non-commercial spread investors, commodity index traders, and non-reportable traders (small speculative and hedging positions).

A list of earlier studies with this finding can be found in Sanders et al. (2010, p. 85). The CIT database is also used by Stoll and Whaley (2010) to investigate Granger causality between index fund trading and commodity futures prices. The authors examine weekly data of 12 agricultural markets from 2006 to 2009 and find only little impact of commodity index investing on futures prices.

Historical data files for the COT Futures-Only reports are available from 1986, and the Futures-and-Options-Combined report since 1995.

As discussed by Stoll and Whaley (2010), the CFTC supplemental report contains separate index positions since 2006.

The reason for using squared innovations is related to our speculation measure and is explained in Sect. 4.2 below.

Since January 2007, the CFTC publishes a supplemental COT report (SCOT) which releases the positions of index traders separately from the non-commercial and commercial positions; the non-reportable positions are not affected. The impact of the re-classification on different speculation proxies is discussed, e.g., in Haase et al. (2017).

The results are available upon request.

We use a somehow loose but more readable terminology in discussing the results; of course, futures prices are cointegrated, not commodities.

In the restricted model, the insignificant adjustment coefficient of the unrestricted model is set equal to zero. The estimation results of the unrestricted model are available upon request; in terms of statistical significance, the results are not different.

In case of two lags: the cumulative coefficients.

The spot price is typically not observable for commodities; it is therefore common practice to use the price of the nearby contract, i.e., the contract with the shortest time to maturity, as a proxy.

The non-commercials also include spread positions, which, however, do not affect the speculation index because they are market neutral.

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Friedman M (1953) The case for flexible exchange rates. In: Essays in positive economics. University of Chicago Press, Chicago, pp 157–203

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Titel: Permanent and transitory price shocks in commodity futures markets and their relation to speculation
verfasst von: Marco Haase
Yvonne Seiler Zimmermann
Heinz Zimmermann
Publikationsdatum: 09.01.2018
Verlag: Springer Berlin Heidelberg
Erschienen in: Empirical Economics / Ausgabe 4/2019
Print ISSN: 0377-7332
Elektronische ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-017-1387-2

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