Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/205318 
Year of Publication: 
2019
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2019-028/II
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
Abstract: 
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.
Subjects: 
Price stability
expectations feedback
commodity futures markets
experimental economics
JEL: 
G41
D84
G13
Document Type: 
Working Paper

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