Cross-market linkages and the role of speculation in agricultural futures markets
Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
In this study we analyse the role of speculation in forging cross-market linkages between agriculture, equity and crude oil over the period 1992-2014. The market interdependence of ten U.S. traded agricultural commodities futures is measured through the spillover index of Diebold and Yilmaz (2009, 2012) and the dynamic conditional correlation framework of Engle (2002). Utilising data from the U.S. Commodity Futures Trading Commission, ve dierent measures of speculation are constructed, which are used to examine the long-run and short-run dynamics between market integration and speculation. To explore time-varying characteristics in this relationship, and as a test for robustness, we perform a sub-sampling analysis for the periods 1992-2006 and 2006-2014.
We show that cross-market linkages grew stronger post-2005, particularly in the aftermath of the 2008 global financial crisis. The results of our econometric analysis indicate that any conclusions regarding the role of speculation in this process are highly sensitive both to the choice of market integration measure, as well as to how the extent of speculation is captured. Overall, though, there is little to indicate that speculation has played an important role in creating cross-market linkages. We do provide some evidence of market integration increasing with market size, but other factors, such as inflation and exchange rates, seem to provide better explanations of agriculture-equity-energy price dynamics. In line with previous research, we also find market interdependence to increase with stock market uncertainty, which suggests that the diversification benefits of commodity futures investments are actually reduced when needed the most. Considered together with our findings on the sizes of markets, which are increasingly made up of speculators, it appears at least possible that financialisation has made food markets more vulnerable to disturbances in financial markets.
Place, publisher, year, edition, pages
2015. , 52 p.
Spillover index, dynamic conditional correlation, commodity futures, speculation, cross-market linkages
IdentifiersURN: urn:nbn:se:liu:diva-120605ISRN: LIU-IEI-FIL-A--15/02095--SEOAI: oai:DiVA.org:liu-120605DiVA: diva2:846861
Subject / course
Master Thesis in Economics
Sjö, Bo, Ph.D.
Hägg, Göran, Ph.D.