Book Description

This master thesis analyses the impact of speculation on the stability of the commodity futures market. The study differentiates between three types of speculation, namely index speculation, non-commercial speculation and excess speculation. In a Vector AutoRegression (VAR) framework I use Granger causality analyses and impulse response functions (IRF) in order to analyse, whether speculation activities have a significant impact on the commodity futures price volatility or not. In particular, the scope of the analysis includes two energy commodities, crude oil and natural gas, an agricultural commodity, corn, and two metals, copper and gold. Applying a relatively new dataset for index investment trading, it shows that index investment had not significantly affected price volatility in the commodity market between 2007 and 2015. In exchange, the results suggest that index speculation rather reduced volatility than the other way around. The same is true for non-commercial or traditional speculation, which neither has destabilized commodity markets during the analysed period between 1993 and 2016. Moreover, the sample is split into two sub-periods in order to analyse possible changes in the dynamics of the commodity markets due to the financialization. Finally, contrasting the findings of the other analyses, it shows that excess speculation had indeed caused an increase in commodity futures prices. The findings suggest that excess speculation had a significant detrimental effect on the stability of the crude oil market. The diversity in the findings emphasizes the importance of distinguishing between the different types of speculation. Altogether, it shows that speculation does, in general, not increase futures price volatility.