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Dec 21, 2022 277 likes •481 views

Do commodity speculators cause hunger? Influence of speculators on volatility and tail events Thijs Benschop Ladislaus von Bortkiewicz Chair of Statistics HumboldtUniversitt zu Berlin http://lvb.wiwi.hu-berlin.de Outline 1-1 Outline

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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

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Outline 1-1

Outline

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

Commodity prices

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Commodity markets 2-1

Commodities

Figure 1: Commodities

Commodity prices

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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

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Commodity markets 3-1

Commodity prices - Copper

2002 2004 2006 2008 2010 2012 2014 200 400 600 800 Date Copper price index

Figure 2: Copper price index (source: Bloomberg)

Commodity prices

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Commodity markets 3-2

Market participants

⊡ Commercial traders ⊡ Non-commercial traders ⊡ Commodity Index Traders ⊡ Who are speculators?

Commodity prices

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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

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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

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Commodity markets 3-5

Commodity prices - GSCI

2002 2004 2006 2008 2010 2012 2014 200 400 600 800 Date SP−GSCI

Figure 3: GSCI price index (source: Bloomberg)

Commodity prices

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Commodity markets 3-6

Commodity prices - DJ-UBSCI

2002 2004 2006 2008 2010 2012 2014 100 200 300 400 500 Date DJ−UBSCI

Figure 4: DJ-UBSCI price index (source: Bloomberg)

Commodity prices

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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

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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

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Research question 5-2

Explanations

⊡ Investor participation in speculation ⊡ Economic growth of emerging economies ⊡ Financial crisis ⊡ Inflation ⊡ Emergence of biofuel

Commodity prices

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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

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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

f coexceedances

Commodity prices

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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

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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

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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

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