Rational destabilization in commodity markets

This article tackles the issue of rational destabilization in the commodity markets. The theoretical framework is a three-period model with futures positions revised within the intermediate holding period of the spot market. Technical traders enter the market in the intermediate period. The model outcome is a multiplicity of equilibria that are a source of instability. We show that the risk management of the rising weight of technical trading generates a higher variability in spot prices and damages long hedging. Furthermore, this article highlights caveats about the empirical measures of hedging pressure and excessive speculation that can be biased.

Automated summary

This article addresses the issue of rational destabilization in commodity markets. Using a three-period model, the study reveals that the increased risk management of technical trading leads to greater volatility in spot prices and negatively affects long hedging. Additionally, the article highlights the caveats regarding empirical measures of hedging pressure and excessive speculation, which may introduce bias.