Does Futures Speculation Destabilize Spot Prices? New Evidence for Commodity Markets

Motivated by repeated price spikes and crashes over the last decade, we investigate whether the rapidly growing market shares of futures speculators have destabilized commodity spot prices. We approximate conditional volatility and regress it on expected and unexpected speculative open interest. In this context, we split our sample into two equally long sub-periods, and document whether the speculative impact on conditional volatility has increased. However, with respect to six heavily traded agricultural and energy commodities, we find no evidence that this is the case. We thus conclude that the increasing financialization of raw material markets has not made them more volatile