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A tale of two tails: Explaining extreme events in financialized agricultural markets
- The substantial booms and busts in agricultural prices marked by extreme events across commodities lead to heated debates about the effects of speculative trading on commodity price fluctuations. This study proposes a new approach to understanding extreme events and boom-bust processes in agricultural markets. Using weekly futures data for twelve indexed agricultural commodities during 2006 to 2016, we find that extreme price changes, located in the 10% tails of the distribution, cluster across agricultural markets. We then implement a multinomial logit model to investigate which factors are associated with the propagation of extreme events. Specifically, we disentangle three transmission conduits. (1) The macroeconomic conduit captures the possibility that the synchronized extreme price events are generated by business-cycle driven demand shifts mainly in emerging economies. (2) The financial conduit refers to potential links between extreme returns and the increasing flow of money from financial participants into agriculturalThe substantial booms and busts in agricultural prices marked by extreme events across commodities lead to heated debates about the effects of speculative trading on commodity price fluctuations. This study proposes a new approach to understanding extreme events and boom-bust processes in agricultural markets. Using weekly futures data for twelve indexed agricultural commodities during 2006 to 2016, we find that extreme price changes, located in the 10% tails of the distribution, cluster across agricultural markets. We then implement a multinomial logit model to investigate which factors are associated with the propagation of extreme events. Specifically, we disentangle three transmission conduits. (1) The macroeconomic conduit captures the possibility that the synchronized extreme price events are generated by business-cycle driven demand shifts mainly in emerging economies. (2) The financial conduit refers to potential links between extreme returns and the increasing flow of money from financial participants into agricultural futures markets. (3) Finally, the energy conduit accounts for possible spillover effects due to oil price shocks. Our results indicate an important role of managed money positions and oil prices while the real demand channel remains mostly insignificant. (C) 2017 Elsevier Ltd. All rights reserved.…
Author details: | Bernardina Algieri, Matthias KalkuhlORCiDGND, Nicolas Koch |
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DOI: | https://doi.org/10.1016/j.foodpol.2017.05.004 |
ISSN: | 0306-9192 |
ISSN: | 1873-5657 |
Title of parent work (English): | Food policy : economics planning and politics of food and agriculture |
Publisher: | Elsevier |
Place of publishing: | Oxford |
Publication type: | Article |
Language: | English |
Year of first publication: | 2017 |
Publication year: | 2017 |
Release date: | 2020/04/20 |
Tag: | Agricultural prices; Futures market; GARCH analysis; Multinomial logit; Tail events |
Volume: | 69 |
Number of pages: | 14 |
First page: | 256 |
Last Page: | 269 |
Funding institution: | Federal Ministry for Economic Cooperation and Development of Germany (Scientific Research Program on "Volatility in Food Commodity Markets and the Poor") |
Organizational units: | Wirtschafts- und Sozialwissenschaftliche Fakultät / Wirtschaftswissenschaften |
Peer review: | Referiert |