Does Futures Speculation Destabilize Commodity Markets?

This paper examines how increased speculator participation in the commodity futures market affects market outcomes, including trades' price impacts, price volatility, and market quality. Contrary to the popular belief that speculators are responsible for the recent commodity price fluctuation,...

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Bibliographic Details
Published in:The journal of futures markets 2015-08, Vol.35 (8), p.696-714
Main Author: Kim, Abby
Format: Article
Language:English
Subjects:
Beliefs
Commodities
Commodity market
Commodity markets
Commodity prices
Futures market
Futures trading
Liquidity
Market theory
Price stabilization
Price theory
Studies
Volatility
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Summary:This paper examines how increased speculator participation in the commodity futures market affects market outcomes, including trades' price impacts, price volatility, and market quality. Contrary to the popular belief that speculators are responsible for the recent commodity price fluctuation, my analysis finds no evidence that speculators destabilize the commodity spot market. Instead, speculators contribute to lower price volatility, enhanced price efficiency, and better liquidity in the commodity markets. More importantly, I show that speculators either have no effect or stabilize prices during periods of large price movement. My findings suggest speculators have had a significant and in fact positive influence on the commodity market during the recent “financialization” period, implying that restricting speculative trading in the futures market is not an efficient way to stabilize the commodity market. © 2015 Wiley Periodicals, Inc. Jrl Fut Mark 35:696–714, 2015
ISSN:0270-7314
1096-9934
DOI:10.1002/fut.21716