Commodity futures prices exploded in 2007-08 and concerns about a new type of participant in commodity futures markets began to emerge. Market participants, regulators, and civic organizations began raising concerns that inflows from new "commodity index" investments were driving the increases in commodity prices instead of economic fundamentals. The main argument was that unprecedented buying pressure from these speculative long-only futures traders created massive bubbles that resulted in prices substantially exceeding fundamental value.
At the time, it was not uncommon to link concerns about speculation and high prices to world hunger, food crises, and civil unrest. Naturally, this outcry resulted in numerous regulatory proposals to restrict speculation in commodity futures markets through transaction taxes, speculative position limits, and even the bizarre idea of a "virtual reserve" whereby a public agency would take futures positions opposite speculators.
At the core, these assertions raised major economic questions about the efficiency of price discovery in commodity futures markets. Moreover, these so-called remedies did not come without a potential cost. Burdensome regulations would increase compliance and risk sharing costs across the global food system -- lowering prices for producers and increasing costs to consumers.
To guide this debate, a rigorous approach was needed to understand the dynamics between prices and commodity index activity. This book documents a curated selection of papers on the impact of index investment on commodity futures prices. The chronology of the papers roughly follows the timeline of our involvement in the world-wide debate about commodity speculation as it evolved after 2007. The 10 papers follow the evolving speculation debate with new author forwards highlighting the contribution and impact. Policy-makers, researchers, and market participants will find this not only as useful documentation of the debate; but, also a natural starting point when high commodity prices inevitably create the next speculation backlash.
Author(s): Scott H. Irwin, Dwight R. Sanders
Publisher: CABI
Year: 2023
Language: English
Pages: 278
City: Boston
Cover
Speculation by Commodity Index Funds
Dedication
Copyright
Contents
About the Authors
1 Intersections
2 Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)1
New Author Foreword
Abstract
2.1 Introduction
2.2 Conceptual Errors
2.3 Inconsistent Facts
2.4 Empirical Tests
2.5 Lessons from History
2.6 Conclusions
Acknowledgments
References
3 New Evidence on the Impact of Index Funds in US Grain Futures Markets1
New Author Foreword
Abstract
3.1 Introduction
3.2 Review of Debate
3.2.1 The bubble story
3.2.2 Arguments against the bubble
3.3 Data
3.4 Tests for Price Impacts
3.5 Conclusions
Acknowledgments
References
4 The Impact of Index and Swap Funds in Commodity Futures Markets1
New Author Foreword
Abstract
4.1 Introduction
4.2 It Was a Bubble
4.3 It Was Not a Bubble
4.4 Evidence to Date
4.5 New Evidence
4.6 Conclusions
References
5 Testing the Masters Hypothesis in Commodity Futures Markets1
New Author Foreword
Abstract
5.1 Introduction
5.2 Measures of Commodity Index Fund Investment
5.2.1 Commitments of Traders (COT) reports
5.2.2 Disaggregated Commitments of Traders (DCOT) report
5.2.3 Supplemental Commitments of Traders (SCOT) report
5.2.4 Index Investment Data (IID) report
5.3 Data and Descriptive Statistics
5.3.1 Comparison of IID, DCOT, and SCOT data
5.3.2 Comparison of mapping algorithm to IID
5.4 Cross-sectional Regression Tests
5.5 Time-series Tests
5.5.1 Granger causality tests
5.5.2 Long-horizon regression tests
5.6 Conclusions
Acknowledgments
References
6 Financialization and Structural Change in Commodity Futures Markets1
New Author Foreword
Abstract
6.1 Introduction
6.2 Trends in Open Interest and Volume
6.3 Structural Changes
6.3.1 Electronic trading
6.3.2 Market access
6.3.3 Passive investment
6.4 Trends in Market Composition
6.5 Market Impacts
6.6 Summary and Conclusions
Acknowledgments
References
7 A Reappraisal of Investing in Commodity Futures Markets1
New Author Foreword
Abstract
7.1 Introduction
7.2 Returns to Individual Commodity Futures Markets
7.3 Returns to Portfolios of Commodity Futures Markets
7.4 Recent Performance of Commodity Investments
7.5 Summary and Conclusions
Acknowledgments
References
8 The ‘Necessity’ of New Position Limits in Agricultural Futures Markets: the Verdict from Daily Firm-level Position Data1
New Author Foreword
Abstract
8.1 Introduction
8.2 Position Data
8.3 Position Trends and Characteristics
8.4 Empirical Methods and Results
8.4.1 Correlation coefficients
8.4.2 Difference-in-means test
8.4.3 Granger causality tests
8.4.4 Long-horizon tests
8.5 Summary and Conclusions
Acknowledgments
References
9 Bubbles, Froth, and Facts: Another Look at the Masters Hypothesis in Commodity Futures Markets1
New Author Foreword
Abstract
9.1 Introduction
9.2 Time-series Analysis
9.2.1 Time-series data
9.2.2 Rank order tests
9.2.3 Time-series correlations
9.2.4 Extreme moves
9.2.5 Consistency
9.3 Cross-sectional Analysis
9.3.1 Cross-sectional data
9.3.2 Cross-sectional regressions
9.4 Summary and Conclusions
Acknowledgments
References
10 Mapping Algorithms, Agricultural Futures, and the Relationship between Commodity Investment Flows and Crude Oil Futures Prices1
New Author Foreword
Abstract
10.1 Introduction
10.2 Literature Review
10.3 Impact of Index Investment on Crude Oil Prices
10.3.1 Impact of index positions from the Masters algorithm
10.3.2 Impact of index positions from alternative sources
10.4 Mapping Algorithms
10.4.1 Replication of commodity indices
10.4.2 The Masters algorithm
10.4.3 Testing fixed-ratio relations
10.4.4 Decomposition of the mapping algorithm results
10.5 Summary and Conclusions
Appendix A. Derivation of Equation (10.3)
Case 1. Non-roll days
Case 2. Non-January roll days
Case 3. January roll days
Appendix B. Supplementary data
Acknowledgments
References
11 Sunshine versus Predatory Trading Effects in Commodity Futures Markets: New Evidence from Index Rebalancing1
New Author Foreword
Abstract
11.1 Introduction
11.2 S&P GSCI Construction and Rebalancing
11.2.1 The S&P GSCI
11.2.2 S&P GSCI rebalancing
11.2.3 Economic significance of the S&P GSCI rebalancing
11.3 Methods
11.4 Results
11.4.1 CARs following the announcement date
11.4.2 CARs around the rebalancing period
Rebalancing versus roll effects
11.4.3 Regressions
Baseline model
Rebalancing effects over time
Rebalancing effects along the futures curve
Rebalancing and the Great Recession
Rebalancing and large commodity markets
Rebalancing and the Bloomberg Commodity Index
11.5 Conclusions
Appendix A. Supplementary Data
Appendix B. Mathematical Derivation of Eqn 11.5
Appendix C. Data Appendix
Credit Author Statement
References
12 The Order Flow Cost of Index Rolling in Commodity Futures Markets1
New Author Foreword
Abstract
12.1 Introduction
12.2 The S&P GSCI Roll
12.3 Index Rolling and the Event Window
12.4 Growth of Order Flow Demand
12.5 Estimated Spread Impacts
12.6 Order Flow Cost Estimates
12.7 Conclusions
Acknowledgments
References
13 Lessons Learned
13.1 First Lesson: the Masters Hypothesis Is False
13.2 Second Lesson: There Is Plenty Left to Do
13.3 Third Lesson: Attacks on Speculation Will Not End Anytime Soon
13.4 Closing Thoughts
References
Index
Back Cover
