Does Index Speculation Impact Commodity Prices? An Intraday Analysis

Date01 August 2013
Published date01 August 2013
The Financial Review 48 (2013) 365–383
Does Index Speculation Impact Commodity
Prices? An Intraday Analysis
Yiuman Tse
University of Missouri-St. Louis
Michael R. Williams
Governors State University
Using intraday data, we findunidirectional causality from commodity index-linked futures
to nonindex-linked commodity futures for up to one hour which disappears when using daily
data. Also, the economic significance of index-linked to nonindex commodity transmission
declines to zero within about an hour. Finally, we find that the magnitude of index-linked to
nonindex return transmission is positively related to the amount of speculation, both long and
short, in S&P GSCI commodity index futures. We conclude that speculative pressures exerted
by commodity index futures can impact nonindex commodities, mainly through the activity of
uninformed, positive feedback traders.
Keywords: index speculation, commodity prices, intraday data
JEL Classifications: G13, G14
Corresponding author: University of Missouri-St. Louis, College of Business Administration One
University Blvd, St. Louis, MO 63121-4400; Phone: (314) 516-6828; Fax: (314) 516-6420; E-mail:
We thank the anonymous referees, the editor (Robert Van Ness), and the seminar participants at the
University of Texasat San Antonio and the FMA meeting in 2011 for comments.
C2013, The Eastern Finance Association 365
366 Y. Tse and M. R. Williams/The Financial Review 48 (2013) 365–383
1. Introduction
Does speculation distort commodity futures prices and increase price volatility?
Debate over the issue has been increasing. First, a 2008 report by the United States
Commodity Futures Trading Commission (CFTC) finds a coincident increase in
commodity index activity and commodity prices. The CFTC believes that this is
evidence of commodity index speculation causing pricing distortions in individual
commodities. However, two recent articles refute this explanation.
Blanch, Schels, Soares, Haase and Hynes (2008) of Merrill Lynch findthat com-
modity index futures open interest and volume mitigate futures price volatility.Thus,
it seems that commodity index futures activity has a price stabilizing influence. Also,
they find that both index-linked and nonindex commodity prices increased during
the recent commodity price boom. However, the prices of nonindex commodities
as well as those of commodities which were dropped from the S&P GSCI index
have increased more than index-linked prices. They argue that if speculation was to
blame, index-linked commodities would have had higher price increases than non-
index commodities. They conclude that the run up in commodity prices was due to
loose monetary policy rather than a result of speculative pressures from commodity
index futures.
Stoll and Whaley (2010) study the impact of commodity index futures specu-
lation and the price dynamics of individual commodity futures. They conclude that
index speculators did not bring about increases in individual commodity prices. Stoll
and Whaley (2010) make this claim based on three findings. First, they examine
the comovement among different commodity futures. They find that correlations are
“low” except for highly fungible commodities. They also find a high correlation
between index-linked and nonindex commodity futures. That is, the returns of com-
modity futures in commodity index funds (e.g., S&P GSCI and DJ-AIG) have a high
correlation with commodities that are not included in commodity index funds.
Second, Stoll, and Whaley (2010) focus on causality between index fund flows
and individual commodity returns. They analyze causality by regressing weekly fund
flows and own-returns onto future (individual) commodity returns. Finding little
statistical evidence of causal relationships, they conclude that speculation does not
impact commodity prices. Third, Stoll and Whaley (2010) note that while fund flows
into commodity index futures doubled during the commodity price bubble, a large
percentage of these flows originated from traders motivated by portfolio rebalancing
or index maintenance needs. Discounting the possibility that portfolio rebalancing
done on purely fundamental grounds could lead to both upward commodity price
pressures as well as vicious cycles of price destabilizing speculation, Stoll and Whaley
(2010) conclude that activity in commodity index funds is “by definition” neither
speculatory nor price destabilizing.
However, the above reports and the literature refuting the price impact of spec-
ulation on commodity prices suffer from the use of low frequency data. This is a
critically important issue given that futures markets are generally active, liquid, and

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