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Do commodity speculators cause hunger? Influence of speculators on volatility and tail events Thijs Benschop Ladislaus von Bortkiewicz Chair of Statistics Humboldt–Universität zu Berlin http://lvb.wiwi.hu-berlin.de

Outline 1-1 Outline 1. Commodity markets 2. Motivation 3. Research question 4. Literature 5. Discussion Commodity prices

Commodity markets 2-1 Commodities Figure 1: Commodities Commodity prices

Commodity markets 2-2 Commodity prices ⊡ energy commodities (oil, gas) and agricultural commodities (grain, meat, coffee) ⊡ dramatic rise and falls of commodity prices during past decade (boom-bust processes) ⊡ increase in financial investor participation in futures markets (diversification benefits) ⊡ financialization of commodity futures markets ⊡ demand and supply fundamentals Commodity prices

Commodity markets 3-1 Commodity prices - Copper 800 Copper price index 600 400 200 0 2002 2004 2006 2008 2010 2012 2014 Date Figure 2: Copper price index (source: Bloomberg) Commodity prices

Commodity markets 3-2 Market participants ⊡ Commercial traders ⊡ Non-commercial traders ⊡ Commodity Index Traders ⊡ Who are speculators? Commodity prices

Commodity markets 3-3 Exposure channels to commodity prices ⊡ Physical transactions of commodities ⊡ Stock in companies depending on commodity prices ⊡ Commodity futures and options ⊡ Commodity indexes Commodity prices

Commodity markets 3-4 Commodity indexes ⊡ Mayor indexes: SP-GSCI and DJ-UBSCI Sector SP-GSCI DJ-UBSCI Agriculture 15.6 34.1 Energy 69.0 30.7 Industrial metals 6.9 15.1 Precious metals 3.6 14.7 Livestock 5.0 5.4 Table 1: Weights of sectors in indexes (2013) Commodity prices

Commodity markets 3-5 Commodity prices - GSCI 800 SP−GSCI 600 400 200 0 2002 2004 2006 2008 2010 2012 2014 Date Figure 3: GSCI price index (source: Bloomberg) Commodity prices

Commodity markets 3-6 Commodity prices - DJ-UBSCI 500 400 DJ−UBSCI 300 200 100 0 2002 2004 2006 2008 2010 2012 2014 Date Figure 4: DJ-UBSCI price index (source: Bloomberg) Commodity prices

Motivation 4-1 Importance ⊡ Policy makers: Should markets be regulated? ⊡ Speculators: Can I participate in commodity markets? ⊡ Consumers and producers: Does speculative trading provide liquidity in the market? Commodity prices

Research question 5-1 What drives commodity prices? ⊡ can tail events be explained by common demand and supply fundamentals? ⊡ does speculative trading amplify the price movements (volatility)? ⊡ how do futures prices influence spot prices? ⊡ was there a bubble in commodity markets? ⊡ current debate on causal effect Commodity prices

Research question 5-2 Explanations ⊡ Investor participation in speculation ⊡ Economic growth of emerging economies ⊡ Financial crisis ⊡ Inflation ⊡ Emergence of biofuel Commodity prices

Literature 6-1 Literature I Literature not finding evidence for financialization ⊡ E.g. Irwin and Sanders (2012) ⊡ Studies focussing on price levels ⊡ No evidence for relationship (Granger causality) ⊡ Speculators provide liquidity for the market Commodity prices

Literature 6-2 Literature II Studies backing up the financialization hypothesis ⊡ Tang and Xiong (2012) ◮ Find increasing correlation between commodity prices and stocks and commodities Focus on commodity indices ◮ ⊡ Koch (2014) Evaluating the relationship between price coexceedances and ◮ financial demand Uses multinomial logit model on residuals ◮ Finds positive relationship between long positions and number ◮ of coexceedances Commodity prices

Literature 6-3 Factors influencing commodity prices (Koch) ⊡ Real demand factors ◮ Shocks in demand (high growth in emerging economies, economic crisis) ◮ Shipping rates, emerging markets index, exchange rates, inventories ⊡ Financial demand factors ◮ Demand of hedgers and speculators ◮ Long positions of traders (CFTC) ⊡ Liquidity factors ◮ Funding liquidity ◮ TED spread (difference between interest rates on interbank loan rates and T-bills) Commodity prices

Discussion 7-1 Objective ⊡ Hypothesis: Speculative investment increases the volatility of commodity prices and amplifies the tails ⊡ Filter out the influence of price fundamentals ⊡ Different approaches to test hypothesis Commodity prices

Discussion 7-2 Choice of methodology ⊡ Is there a causal effect between speculative trading and the prices of commodities? ⊡ Granger causality ⊡ (Composite) quantile regression ⊡ Tail dependence ⊡ Single Index Model Commodity prices

Do commodity speculators cause hunger? Influence of speculators on volatility and tail events Thijs Benschop Ladislaus von Bortkiewicz Chair of Statistics Humboldt–Universität zu Berlin http://lvb.wiwi.hu-berlin.de