The Quality of Commodity Futures Markets
Economic Policy, Applied Economics
Final Report Abstract
This project has conducted a comprehensive study of commodity futures markets quality. The main objective is to analyze how the financialization of commodity markets has affected the two dimensions of market quality, liquidity and price efficiency, and how market quality is affected by the composition of different market participants. The arrival of index investors during the first half of the 2000s represents a drastic change in trader composition and resulted in a discussion about adverse effects of speculation on the functioning of markets. To measure market quality, the extant literature relies on the analysis of high-frequency intraday quote data. However, such data for commodity futures are only reliably available after 2008. In order to study market quality over a longer period, proxies based on daily or intraday Time and Sales data are required that allow extending the sample period to the pre-financialization period, for which high-frequency quote data does not exist. This enables a study of the impact of the financialization and the switch to electronic trading of commodity markets on its quality. It allows a detailed analysis of commodity market quality using different identification strategies, such as a case study of soybean meal, or a regression approach that uses positions data from the Commodity Futures Trading Commission (CFTC). The insights shall contribute to the understanding of the interplay between hedgers, speculators, arbitrageurs, and index investors in general and in commodity futures markets in particular. Insights into the question of how different market participants consume or provide liquidity, and how they affect price discovery. The results are relevant for the design and regulation of well-functioning markets, and thus of high interest for every market participant and policymaker alike.
Publications
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Measuring commodity market quality. Journal of Banking & Finance, 145, 106658.
Lauter, Tobias & Prokopczuk, Marcel
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Commodity market quality: Evidence from high-frequency data, Working Paper.
Lauter, T., M. Prokopczuk & S. Trueck
