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Rebuttal Of OECD Study: Impact Of Speculative Activity On Commodity Markets




This is a guest post by David Frenk, Executive Director of Better Markets:

Last week, OECD published a report co-authored by two Illinois professors, Scot Irwin and Dwight Sanders. The report, entitled Speculation and Financial Fund Activity, purports to find statistical evidence that speculation played no role in generating the damaging volatility in food and energy prices witnessed during 2008-9. In fact, it claims that speculation by long-only index investors with no understanding of underlying supply and demand conditions actually helped reduce volatility, by providing liquidity.

The study and its findings can be disregarded for three reasons:

  1. The statistical methods applied are completely inappropriate for the data used.
  2. The study is contradicted by the findings of other studies that apply more appropriate statistical methods to the same data
  3. The overall analysis is superficial and easily refuted by looking at some basic facts.

Please find attached a review of the study, which goes into more detail on these points:

(Many thanks to Babak, Prof. Wei Jong, and Prof. Kenneth Medlock, all of whom granted permission to reproduce figures.)

Specifically, the authors of the OECD study use a Granger causality test, which is a perfectly good statistical tool in its own right (we have used it ourselves in other contexts). However, Granger tests can only be used for certain kinds of data. They are known to give unreliable results when applied to highly volatile data sets like commodities prices. In fact, there are several academic papers that argue convincingly for the inapplicability of Granger tests to stock and commodities price data.

Second, even disregarding the inapplicability of the test itself, the test parameters used in the OECD test are inappropriate: they mostly study fluctuations over the space of a week, whereas those who argue speculation has affected commodities prices are generally talking about a much broader time period.

Finally, a Granger test can only be interpreted with reference to some underlying theory. As an alternative to the view that speculation drove commodities prices in 2008, the OECD study claims that prices, including those of wheat, cotton and oil, were purely determined by supply and demand from producers and consumers. As the review discusses, EIA data shows conclusively for the case of oil that supply was rising while demand was falling during the fastest price rise in history, which indicates strongly that supply and demand from consumers and producers was not the driving factor.

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3 Responses to “Rebuttal Of OECD Study: Impact Of Speculative Activity On Commodity Markets”  

  1. 1 Daniel P

    Do you have a copy of the academic paper(s) that argue for the inapplicability of granger tests to stock and commodities price data? My friends who have argued with me in the past about the price impact of commodity speculation will be headed over with the OECD paper in hand. I need fodder.

    Thanks for the great work on the blogg

    Daniel P.

  2. 2 Babak

    Daniel, the studies are cited by Frenk in footnotes 14 and 15. The first is "Testing Covariance Stationarity Under Moment Condition Failure with an Application to Common Stock Returns" available here and the second is: "Testing For Covariance Stationarity in Stock Market Data", available here

  3. 3 Abhishek

    Hello sir,
    I am student of Delhi School of Economics,INDIA. I AM pursuing my M.A economics from here.
    I have decided to make a term paper on the price impact of commodity speculation.
    Sir, can you halp me in searching for data..
    From where i can get the recent and reliable data on commodities.
    Also after studying that Granger Causality test is not applicable for this vary topic , i am now more enthusiast of making my term paper on this topic.
    Thank you
    Student of D.S.E.

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