A Speculative Bubble in Commodity Futures Prices? Cross-Sectional Evidence

Recent accusations against speculators in general and long-only commodity index funds inparticular, include: increasing market volatility, distorting historical price relationships, andfueling a rapid increase and decrease in commodity inflation. Some researchers have argued thatthese market participants—through their impact on market prices—may inadvertently prevented theefficient distribution of food aid to deserving groups. Certainly, this result—if substantiated—would counter the classical argument that speculators make prices more efficient and thus improvethe economic efficiency of the agricultural and food marketing system. Given the very importantpolicy implications, it is crucial to develop a more thorough understanding of long-only index fundsand their potential market impact. Here, we review the criticisms (and rebuttals) levied against(and for) commodity index funds in recent U.S. Congressional testimonies. Then, additionalempirical evidence is added regarding cross-sectional market returns and the relative levels oflong-only index fund participation in 12 commodity futures markets. The results suggest that indexfund positions across futures markets have no impact on relative price changes across thosemarkets. The empirical results provide no evidence that long-only index funds impact commodityfutures prices.