Price discovery in commodity markets

Abstract

This article investigates the long-run relationship between spot and futures prices for corn and soybean. We apply cointegration methodology allowing for the presence of potentially unknown structural breaks in the commodities prices and we then study the causality relationships between spot and futures prices within each specific sub-period identified, with the aim to analyze where changes in spot and futures price originate and how they spread. Empirical estimates highlight the following evidence: i) multiple breaks exist in the cointegrating relationship between spot and futures prices for corn and soybean; ii) subperiods consequently identified express different dynamics in the causal relationship between spot and futures prices and support the idea that supply and demand fundamentals are important in explaining the 2007/08 food price increase.

Spatial price transmission on agricultural commodity markets under different volatility regimes

“…According to Powers (1970), Cox (1976), Peck (1976) and Telser (1981), a futures market increases the information incorporated in spot prices because it allows to centralize and to spread the disseminated information about prices to all economic agents. The empirical studies of Garbade and Silber (1983), Brorsen et al (1984), Yang et al (2001) and Peri et al (2013) show that a futures market dominates the price discovery process. A new information is first incorporated in futures prices and after in spot prices.…”

Stock markets’ bubbles burst and volatility spillovers in agricultural commodity markets

“…An increasing awareness of institutional investors of these rising correlation dynamics -signalling a likely reduction in the diversification role of commodities in financial portfolios − may slow down investments in commodity indexes, with a reduction in spillover effects. This might benefits commodity markets, given that agricultural commodity's prices are now determined by financial investors' strategies, and not only by supply and demand levels (Tadesse et al, 2014;Peri et al, 2013). However, commodities have fully become part of financial markets strategies and it is unlikely that institutional investors completely leave these alternative asset classes.…”

“…Indeed, increase in flow of funds by institutional investors for diversifying assets in traditional portfolios has been much stronger, compared to the past (Irwin and Sanders, 2011;Cheng et al, 2014;Peri et al, 2013;Baldi et al, 2014;Huchet and Fam, 2016), and commodity index traders have been the main vehicle for investing in commodities (Stoll and Whaley, 2010). According to the Commodity Futures Trading Commission (CFTC), while at the beginning of the new millennium physical hedgers represented almost 80% of positions in commodity futures and options, in 2012 they accounted for less than 30%.…”

Price discovery dynamics in European agricultural markets

“…The empirical findings underscore the dominant role of futures markets in the price discovery process and they are qualitatively similar for samples before and during the years of price turmoil. This suggests that the financialization did not significantly disrupt commodity pricing in agricultural futures markets (e.g., Brockman & Tse, ; Brorsen, Bailey, & Richardson, ; Covey & Bessler, ; Dwyer, Holloway, & Wright, ; Hernandez & Torero, ; Peri, Baldi, & Vandone, ).…”