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Technical Trading and Commodity Price Fluctuations

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  • Stephan Schulmeister

Abstract

The study examines the empirical relevance of two antagonistic hypotheses of commodity price dynamics. The "fundamentalist hypothesis" implies that commodity prices are determined exclusively by supply and demand conditions in spot markets. The "bull-bear hypothesis" assumes that also destabilising speculation plays an important role in the price formation process. The extent of commodity price fluctuations since the late 1980s, in particular the boom 2007-08 and the subsequent bust, can hardly be accounted for by market fundamentals. At the same time, trading volume on commodity derivatives exchanges has been quadrupling since mid-2000s. This increase was probably due to rising speculation, to a great extent based on technical trading systems. This presumption is confirmed by the results of testing the performance of 1,092 technical trading systems in the futures markets for crude oil, corn, wheat and rice. Most of the models would have been profitable not only over the entire sample period but also over most sub-periods. If one aggregates over the transactions and open positions of the 1,092 technical models, it turns out that technical commodity futures trading exerts an excessive demand (supply) pressure on commodity markets.

Suggested Citation

  • Stephan Schulmeister, 2012. "Technical Trading and Commodity Price Fluctuations," WIFO Studies, WIFO, number 45238, April.
    • Handle: RePEc:wfo:wstudy:45238
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Küblböck, Karin & Staritz, Cornelia, 2014. "Regulation of commodity derivative markets: Critical assessment of reforms in the EU," Policy Notes 12/2014, Austrian Foundation for Development Research (ÖFSE).
    2. Staritz, Cornelia & Küblböck, Karin, 2013. "Re-regulation of commodity derivative markets: Critical assessment of current reform proposals in the EU and the US," Working Papers 45, Austrian Foundation for Development Research (ÖFSE).
    3. Stephan Schulmeister, 2015. "The struggle over the Financial Transactions Tax. A politico-economic farce," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(5), pages 15-55.
    4. Stefan Ederer & Christine Heumesser & Cornelia Staritz, 2016. "Financialization and commodity prices -- an empirical analysis for coffee, cotton, wheat and oil," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(4), pages 462-487, July.
    5. Ding, Shusheng & Cui, Tianxiang & Zheng, Dandan & Du, Min, 2021. "The effects of commodity financialization on commodity market volatility," Resources Policy, Elsevier, vol. 73(C).
    6. Serrao, Amilcar, 2016. "A controversial debate between financial speculation and changes in agricultural commodity spot prices," 2016 Annual Meeting, July 31-August 2, Boston, Massachusetts 235638, Agricultural and Applied Economics Association.
    7. Stephan Schulmeister, 2020. "Fixing long-term price paths for fossil energy: the optimal incentive for limiting global warming," ICAE Working Papers 112, Johannes Kepler University, Institute for Comprehensive Analysis of the Economy.
    8. Troester, Bernhard & Staritz, Cornelia, 2013. "Fundamentals or financialisation of commodity markets: What determines recent wheat prices?," Working Papers 43, Austrian Foundation for Development Research (ÖFSE).
    9. Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) (ed.), 2015. "Österreichische Entwicklungspolitik 2015. Rohstoffe und Entwicklung," Austrian Development Policy Report, Austrian Foundation for Development Research (ÖFSE), number 268194.

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