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Does futures speculation stabilize spot prices? Evidence from metals markets

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  • Ahmet Enis Kocagil

Abstract

An attempt is made to test empirically the hypothesis that increased speculation in futures markets stabilizes spot price volatility in metals markets. This is confirmed not by an ad hoc volatility ratio test but by generalizing the framework of Driskill et al. (Driskill, R., McCafferty, S. and Sheffrin, S., 1991. Speculative intensity and spot futures price variability, Economic Inquiry, 29, 737-751) and Kawai (Kawai, M. 1983. Price volatility of storable commodities under rational expectations in spot and futures markets, International Economic Review, 24, 1313-1317). The hypothesis is tested using a critical condition generated by the model: the test is based on data from the copper, gold, silver and aluminium markets. The significance of the estimated coefficients is analysed by Monte Carlo methods. The empirical results, which are based on these four metals markets for the period 1980-1990, reject the hypothesis that an increase in the intensity of futures speculation tends to decrease the spot price volatility, and thus stabilizes spot markets.

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  • Ahmet Enis Kocagil, 1997. "Does futures speculation stabilize spot prices? Evidence from metals markets," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 115-125.
    • Handle: RePEc:taf:apfiec:v:7:y:1997:i:1:p:115-125
    DOI: 10.1080/096031097333907
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    3. Batista Soares, David & Borocco, Etienne, 2022. "Rational destabilization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 25(C).
    4. Yiuman Tse & Michael R. Williams, 2013. "Does Index Speculation Impact Commodity Prices? An Intraday Analysis," The Financial Review, Eastern Finance Association, vol. 48(3), pages 365-383, August.
    5. Mayer, Herbert & Rathgeber, Andreas & Wanner, Markus, 2017. "Financialization of metal markets: Does futures trading influence spot prices and volatility?," Resources Policy, Elsevier, vol. 53(C), pages 300-316.
    6. Patricio Jaramillo & Jorge Selaive, 2006. "Speculative Activity and Copper Price," Working Papers Central Bank of Chile 384, Central Bank of Chile.
    7. Sigl-Grüb, C. & Schiereck, D., 2010. "Speculation and Nonlinear Price Dynamics in Commodity Futures Markets," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 56603, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    8. Go, You-How & Lau, Wee-Yeap, 2017. "Investor demand, market efficiency and spot-futures relation: Further evidence from crude palm oil," Resources Policy, Elsevier, vol. 53(C), pages 135-146.
    9. David Batista Soares & Etienne Borocco, 2022. "Rational destabilization in commodity markets [Déstabilisation rationnelle des marchés de matières premières]," Post-Print hal-03256534, HAL.
    10. Riza Emekter & Benjamas Jirasakuldech & Peter Went, 2012. "Rational speculative bubbles and commodities markets: application of duration dependence test," Applied Financial Economics, Taylor & Francis Journals, vol. 22(7), pages 581-596, April.
    11. Ahmed A. A. Khalifa & Hong Miao & Sanjay Ramchander, 2011. "Return distributions and volatility forecasting in metal futures markets: Evidence from gold, silver, and copper," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 31(1), pages 55-80, January.
    12. Elder, John & Miao, Hong & Ramchander, Sanjay, 2012. "Impact of macroeconomic news on metal futures," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 51-65.
    13. Yiuman Tse & Michael Williams, 2011. "Does Index Speculation Impact Commodity Prices? An Intraday Futures Analysis Using intraday data, we find that unidirectional causality runs from commodity index linked commodity futures to non-index ," Working Papers 0007, College of Business, University of Texas at San Antonio.

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