A tale of two tails: Explaining extreme events in financialized agricultural markets

Bernardina Algieri, Matthias Kalkuhl and Nicolas Koch

Food Policy, 2017, vol. 69, issue C, 256-269

Abstract: 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 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.

Keywords: Agricultural prices; Futures market; Tail events; GARCH analysis; Multinomial logit (search for similar items in EconPapers)
JEL-codes: C25 C58 E44 Q14 (search for similar items in EconPapers)
Date: 2017
References: Add references at CitEc
Citations: View citations in EconPapers (13)

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Working Paper: A Tale for Two Tails: Explaining Extreme Events in Financialized Agricultural markets (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfpoli:v:69:y:2017:i:c:p:256-269

DOI: 10.1016/j.foodpol.2017.05.004

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