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The effect of futures markets on the stability of commodity prices

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  • de Jong, Johan
  • Sonnemans, Joep
  • Tuinstra, Jan

Abstract

Do futures markets have a stabilizing or destabilizing effect on commodity prices? The empirical evidence is inconclusive. We try to resolve this question by means of a learning-to-forecast experiment in which a futures market and a spot market are coupled. The strength of the coupling depends positively on the number of speculators on the futures market and negatively on storage costs and speculator risk aversion. We find that the spot price volatility changes non-monotonically with the strength of the coupling, resulting in a stabilizing effect on spot prices for weakly coupled markets and a destabilizing effect when the coupling with the futures market is strong.

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  • de Jong, Johan & Sonnemans, Joep & Tuinstra, Jan, 2022. "The effect of futures markets on the stability of commodity prices," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 176-211.
    • Handle: RePEc:eee:jeborg:v:198:y:2022:i:c:p:176-211
    DOI: 10.1016/j.jebo.2022.03.025
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    2. Evans, George W. & Hommes, Cars & McGough, Bruce & Salle, Isabelle, 2022. "Are long-horizon expectations (de-)stabilizing? Theory and experiments," Journal of Monetary Economics, Elsevier, vol. 132(C), pages 44-63.

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    More about this item

    Keywords

    Expectations feedback; Futures markets; Price volatility; Experimental economics;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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