Thursday, July 30, 2009

A look at whether futures market contracts inpact spot pricing


FRB: FEDS Abstract 2009-29:
"This paper finds no evidence that speculative activity in futures markets for industrial metals caused higher spot prices in recent years. The empirical analysis focuses on industrial metals with and without futures contracts.....

...comovement between metals with and without futures contracts has not weakened in recent years as speculative activity has risen.....This comovement is driven by economic fundamentals because world GDP growth is strongly correlated with metal price growth, especially after 2002. The structural change in 2002 is also consistent with supply and demand information found in industry newsletters..... test follows storage models, which suggest that speculation can affect spot markets only if it leads to physical hoarding. Focusing on metals with established futures markets, I find no evidence of physical hoarding because inventory growth is found to be negatively correlated with price growth rates."

A few questions remain unanswered to me, but very interesting. This topic has been in the news a great deal lately.

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