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Does Futures Speculation Destabilize Commodity Markets?
Author(s) -
Kim Abby
Publication year - 2015
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21716
Subject(s) - speculation , futures contract , economics , contango , financialization , volatility (finance) , market liquidity , commodity market , monetary economics , financial economics , futures market , commodity , spot market , spot contract , commodity swap , market economy , finance , electricity , electrical engineering , engineering
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