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Speculation and price volatility : the case of rice in United States

University of British Columbia

In response to the rampant and high volatility in rice prices relative to other grains over the past few decades and calls by governments for tighter control and regulation on futures trading to limit speculation and curtail volatility, this work evaluates the performance of the rice futures market in United State in terms of its impact on the nation’s rice cash price volatility. This study presents a refined form of Milton Friedman’s original theory (1953) that speculation leads to less volatility unless it is carried out by irrational speculators. It will test this theory empirically using time series econometrics. Generalized autoregressive conditional heteroskedasticity (GARCH) is used to measure volatility of the price of rice. Vector autoregressive (VAR) models are deployed to measure the impact of trading activity on cash price volatility through Granger Causality test, forecast error variance decomposition (FEVD), and impulse response (IR) methods. Results show that rice cash price volatility after the introduction of the rice futures market on the Chicago Board of Trade is lowered by 51%. The Granger Causality test also indicates that sudden changes in the futures market trading activity (proxy for the presence of irrational speculators) cause higher volatility in the cash market. The FEVD, and IR methods indicate that a sudden rise in non-commercial open interest has a larger impact on cash price volatility than changes in trading volume.

Text

2011-08-26

Attribution 3.0 Unported

http://hdl.handle.net/2429/36925

Agricultural Economics

University of British Columbia

UBCV

http://creativecommons.org/licenses/by/3.0/