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Bubbles, Froth and Facts: Another Look at the Masters Hypothesis in Commodity Futures Markets
Author(s) -
Sanders Dwight R.,
Irwin Scott H.
Publication year - 2017
Publication title -
journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.157
H-Index - 61
eISSN - 1477-9552
pISSN - 0021-857X
DOI - 10.1111/1477-9552.12191
Subject(s) - futures contract , commodity , economics , contango , financial economics , value (mathematics) , commodity market , index (typography) , empirical research , empirical evidence , futures market , commodity pool , random walk hypothesis , efficient market hypothesis , monetary economics , market economy , finance , paleontology , philosophy , epistemology , horse , machine learning , world wide web , computer science , stock market , biology , passive management , fund of funds , market liquidity
The Masters Hypothesis suggests that long‐only index funds were the main cause of a massive increase in commodity prices in 2007–2008 and 2011–2012. Central to the Masters Hypothesis are three basic tenets: (i) long‐only commodity index funds were directly responsible for driving futures prices higher; (ii) the deviations from fundamental value were economically very large; (iii) the impact was pervasive across commodity futures markets. There has been a great deal of empirical research on the Masters Hypothesis and commodity market bubbles. However, surprisingly few studies have found evidence that directly support the main tenets of the Masters Hypothesis. Some have attributed the lack of supporting evidence to the low‐power of time‐series tests, market efficiency issues and a lack of conditioning variables within models. In this paper, we address each of these issues using updated data and new empirical approaches. Still, price behaviour consistent with the Masters Hypothesis is surprisingly difficult to find in the data. This is an important finding given the on‐going policy debate and regulations proposed or being implemented to limit speculative positions in these markets.