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The role of index trading in price formation in the grains and oilseeds markets

Gilbert, C. L. and Pfuderer, S. (2014) The role of index trading in price formation in the grains and oilseeds markets. Journal of Agricultural Economics, 65 (2). pp. 303-322. ISSN 1477-9552

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To link to this item DOI: 10.1111/1477-9552.12068


We use both Granger-causality and instrumental variables (IV) methods to examine the impact of index fund positions on price returns for the main US grains and oilseed futures markets. Our analysis supports earlier conclusions that Granger-causal impacts are generally not discernible. However, market microstructure theory suggests trading impacts should be instantaneous. IV-based tests for contemporaneous causality provide stronger evidence of price impact. We find even stronger evidence that changes in index positions can help predict future changes in aggregate commodity price indices. This result suggests that changes in index investment are in part driven by information which predicts commodity price changes over the coming months.

Item Type:Article
Divisions:Life Sciences > School of Agriculture, Policy and Development > Department of Agri-Food Economics & Marketing
ID Code:41013
Uncontrolled Keywords:Futures markets, Granger causality, grains and oilseeds, hedging, instrumental variables, options


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