Futures markets: role of non-commercial traders · Futures markets: role of non-commercial traders...
Transcript of Futures markets: role of non-commercial traders · Futures markets: role of non-commercial traders...
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Futures markets: role of non-commercial traders
ICC-124-5
124nd Session - International Coffee Council
Nairobi, Kenya
CYCLES OF HIGH AND LOW COFFEE PRICES, 1994 – 2018
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50
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350
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94
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99
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01
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US
cen
ts/lb
Colombian Milds Other Milds Brazilian Naturals Robustas
Shaded areas: periods of decreasing prices
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SIX MEASURES OF SPECULATION
• Monthly volume of futures contracts
• Monthly open interest in futures contracts
• Ratio of volume to open interest
• Ratio of long positions held by non-commercialtraders to total reportable long positions
• Ratio of short positions held by non-commercialtraders to total reportable short positions
• Index traders’ net positions (= long minus short)– Arabica futures market only
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MEASURES OF SPECULATION
1. Volume 2. Open interest
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200
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700
Mar
-199
4
Mar
-199
6
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-199
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-200
0
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-200
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-200
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-200
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-200
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-201
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-201
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-201
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-201
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Mar
-201
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Vol
ume
inde
x(1
st q
uart
er 1
994
= 1
00)
Financial Crisis 2008Robusta volArabica vol
0
100
200
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600
Mar
-199
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Mar
-199
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Mar
-199
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Mar
-200
0
Mar
-200
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Mar
-200
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-200
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-200
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-201
0
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-201
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-201
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-201
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-201
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Ope
n in
tere
st in
dex
(1st
qua
rter
199
4 =
100
)
Financial Crisis 2008Robusta OIArabica OI
Measure of liquidity in the market – attracts investorsWeak measure of speculation
Indicator of trading interest, confidence in the market – attracts medium-long term investors
MEASURES OF SPECULATION
3. Ratio Volume / Open interest
Measure of short-term speculation: high volumes with low open interest = higher ratio
0.0
1.0
2.0
3.0
4.0
5.0
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8.0
Ma
r-19
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Ma
r-19
96
Ma
r-19
98
Ma
r-20
00
Ma
r-20
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Ma
r-20
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Ma
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Ma
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Ma
r-20
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Ma
r-20
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Ma
r-20
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Ma
r-20
18
Robusta Vol/OI ratioArabica Vol/OI ratio
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MEASURES OF SPECULATION: NON-COMMERCIAL POSITIONS TO TOTAL REPORTABLE POSITIONS
4. Long 5. Short
Commercial traders -use futures contracts for hedging purposes (CFTC)Non-commercial positions (short or long) mainly represent speculative activity in pursuit of financial profits
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1.0
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2008
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2009
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2012
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2013
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2017
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2018
Ra
tio
Robusta noncomm-long
Arabica noncomm-long0.0
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1.0
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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2013
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2014
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2015
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2016
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2017
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2018
Ra
tio
Robusta noncomm-short
Arabica noncomm-short
MEASURES OF SPECULATION
6. Index traders’ net positions
Measure of speculation: These traders hold positions in a mix of commodity markets:Assumption: purposes other than hedging against commodity-specific risks (Robles et al., 2009).
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2007
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2008
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2009
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2010
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2011
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2012
Jan-
2013
Jan-
2014
Jan-
2015
Jan-
2016
Jan-
2017
Jan-
2018N
umbe
r of
(eq
uiva
lent
) fu
ture
s co
ntra
cts
(tho
usan
ds)
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Methodology
GRANGER CAUSALITY TESTS
• Time series analysis
• Two statistical models:– M1: Relationship between the past behaviour
of prices with their current level (forecasting), . . . ,
– M2: Incorporates past speculation activity in M1 to assess its predictive power on present spot prices
, . . . , , , . . . ,
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GRANGER CAUSALITY TESTS
• Estimation of M1 and M2
• Test:
at a 95% statistical confidence level
• If the difference is at least zero (=>0): there is evidence of influence or predictive power of
speculation on coffee prices
• Values greater than zero only indicate a higher statistical confidence level, ex: 99%• No strong influence or power of speculation
Results
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ARABICA
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10
199
8m2
199
9m2
200
0m2
200
1m2
200
2m2
200
3m2
200
4m2
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5m2
200
6m2
200
7m2
200
8m2
200
9m2
201
0m2
201
1m2
201
2m2
201
3m2
201
4m2
201
5m2
201
6m2
201
7m2
201
8m2
Ind
ex =
F s
tati
stic
-F
cri
tica
l va
lue
Volume Open Interest (OI)Ratio -Vol/OI Ratio - NonC pos (long)Ratio - NonC pos (Short) IndexT - net pos
Note: Dates indicate last month of a 50-month period
ROBUSTA
Note: Dates indicate last month of a 50-month period
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5
10
15
20
25
1998
m2
1999
m2
2000
m2
2001
m2
2002
m2
2003
m2
2004
m2
2005
m2
2006
m2
2007
m2
2008
m2
2009
m2
2010
m2
2011
m2
2012
m2
2013
m2
2014
m2
2015
m2
2016
m2
2017
m2
2018
m2Ind
ex =
F s
tati
stic
-F
cri
tica
l val
ue
Volume Open Interest (OI)
Ratio -Vol/OI Ratio - NonC pos (long)
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CONCLUSIONS
• Speculative activity has predictive power over spot market prices in specific short time periods.
• No significant evidence of speculative activity affecting spot market prices during the recent downturn of the coffee market since 2016
• Speculation can exacerbate price trends in the short-term, but fundamentals (demand trends and supply shocks) prevail in the long-term
CONCLUSIONS - REGULATION
• Regulatory interventions can help to manage the impact of speculation:– Limiting the positions held by non-commercial
traders• Dodd-Frank Wall Street Reform and Consumer
Protection Act in the US
– Increasing costs of non-hedging participation in the market
– Imposing capital requirements for each transaction
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Thank you