The Effect of Futures Markets on the Stability of Commodity Prices

Arbeitspapier

Do futures markets have a stabilizing or destabilizing effect on commodity prices? Empirical evidence is inconclusive. We try to resolve this question by means of a learning-to-forecast experiment in which a futures market and a spot market are coupled. The spot market exhibits negative feedback between forecasts and prices, while the futures market is of the positive feedback type, which makes it susceptible to bubbles and crashes. We show that the effect of a futures market on spot price stability changes non-monotonically with the strength of the coupling between the spot and futures markets. This coupling depends positively on the number of speculators on the futures market and negatively on storage costs, speculator risk aversion, and the volatility of futures prices. In the end we observe a stabilizing effect on spot prices for weakly coupled markets and a destabilizing effect when the coupling with the futures market is strong.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2019-028/II

Classification and Topics

• Classification: Wirtschaft ; Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets‡ ; Expectations; Speculations ; Contingent Pricing; Futures Pricing; option pricing
• Subject: Price stability ; expectations feedback ; commodity futures markets ; experimental economics

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): de Jong, Johan ; Sonnemans, Joep ; Tuinstra, Jan
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/205318
• Last update: 10.03.2025, 11:43 AM CET