Financial Speculation Impact on Agricultural and Other Commodity Return Volatility: Implications for Sustainable Development and Food Security

• Published in: Agriculture (Basel) 2022-11, Vol.12 (11), p.1892
• Main Authors: Staugaitis, Algirdas Justinas, Vaznonis, Bernardas
• Format: Article
• Language: English
• Subjects: Agricultural commodities; Agricultural economics; agricultural futures; Analysis; Commodities; Commodity futures; commodity futures markets; Commodity markets; Commodity price indexes; Commodity prices; Crude oil; Environmental factors; Exchanging; Financial instruments; financial speculation; Food security; Food supply; Forecasts and trends; Futures market; Futures trading; Gold; Grain industry; Hedging; Hypotheses; International economic relations; Legislation; Oats; Pandemics; Prices and rates; Pricing; return volatility; Risk premiums; Seasonal variations; Securities markets; Security; Soybeans; Speculation; Supply & demand; Sustainable agriculture; Sustainable development; TGARCH; Trade restrictions; Volatility
• ISSN: 2077-0472; 2077-0472
• DOI: 10.3390/agriculture12111892

Global commodity markets, due to major health crises, political tension, sanctions, growing demand, and other global supply and demand factors, are currently particularly unstable. In addition to the macro-environmental factors that drive the prices, agricultural and other commodity markets are becoming more susceptible to the continuously-growing speculation on major commodity exchanges. Therefore, the purpose of this study is to analyze the influence of financial speculation on agricultural and other commodity prices and return volatility. In our study, we use daily returns on wheat, soybean, corn, and oats futures from the Chicago Mercantile Exchange as well as two additional commodities (crude oil and gold) to compare the extent of this effect. To measure this impact, we, besides traditional tools for time-series analysis, apply the threshold autoregressive conditional heteroskedasticity (TGARCH) technique. We also provide a model using dummy variables for the season to determine whether or not financial speculation’s impact on return volatility differs among seasons, as seasonality plays an important role in return dynamics for agriculture. Our study’s findings show that financial speculation, except for the oats market, either has no impact or makes the underlying futures returns less volatile. Therefore, we draw the conclusion that either there is no relationship between the rise in short-run speculation and the volatility of agricultural commodity prices, or the link is at best questionable. Research results provide important implications for the sustainable development of commodity markets, as passive legislation measurers can be seen as more effective ones compared to more strict active ones in order to maintain these markets liquid and capable of distributing price risks for agricultural producers and manufacturers in a challenging economic and geopolitical environment.