Index Funds, Financialization, and Commodity Futures Markets

May combine two claims.

In the Barclays Capital survey, 43% of respondents said portfolio diversification, 31% said absolute returns, 9% said inflation hedge, and 17% said emerging market growth.

“In response to the question, “Why do you invest in commodities,” 43% of respondents said portfolio diversification, 31% said absolute returns, 9% said inflation hedge, and 17% said emerging market growth.”

• cites Norrish 2010Not checked yet

  Not checked in the free run.

May combine two claims.

These conclusions, combined with deep and liquid exchange-traded futures contracts, set off a dramatic surge in commodity index fund investments.

“Combined with the availability of deep and liquid exchange-traded futures contracts, these conclusions set off a dramatic surge in commodity index fund investments.”

May combine two claims.

Swap dealer netting is relatively small in agricultural futures markets but can be quite large in energy and metals markets.

“Swap dealer netting has been shown to be relatively small in agricultural futures markets, where swap dealers do relatively little non-index business; however, it can be quite large in the energy and metals markets (CFTC 2008).”

• cites CFTC 2008Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim. May combine two claims.

Several influential academic studies concluded that investors can capture substantial risk premiums and reduce portfolio risk through relatively modest investments in long-only commodity index funds.

“Several influential academic studies concluded that investors can capture substantial risk premiums and reduce portfolio risk through relatively modest investments in long-only commodity index funds (e.g., Gorton and Rouwenhorst 2006;Erb and Harvey 2006).”

• cites Gorton and Rouwenhorst 2006Not checked yet

  Not checked in the free run.

• cites Erb and Harvey 2006Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

If any of those assumptions are violated, a pricing bubble can form.

“If any of these assumptions are violated, then a pricing bubble can form.”

• cites Tirole 1982Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Caballero, Farhi, and Gourinchas (2008) develop a theoretical model emphasizing macro forces that may drive a bubble in commodity prices.

“Caballero, Farhi, and Gourinchas ( 2008) develop a theoretical model that emphasizes the underlying “macro” forces that may be driving a bubble in commodity prices.”

• cites Caballero, Farhi, and Gourinchas (2008) sourceNot checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Large price swings sometimes occur naturally and in response to shifts in supply and demand.

“As Barlevy (2007) points out, the problem with this popular usage is that large price swings sometimes occur naturally and in response to shifts in supply and demand.”

• cites Barlevy (2007)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

The main difficulty of identifying an asset pricing bubble is disentangling price movements due to changing supply and demand fundamentals from those due to bubble behavior.

“This highlights the main difficulty of identifying an asset pricing bubble: disentangling movements in an asset's price due to changing supply and demand fundamentals from those due to bubble behavior.”

Probably not a substantial claim: may not pass S3 (load-bearing).

Rational traders may restrain arbitrage positions due to noise trader risk.

“Rational traders would normally arbitrage any mispricing that results, but they may also restrain arbitrage positions due to noise trader risk (De Long et al. 1990).”

• cites De Long et al. 1990Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

In that model, commodity producers in less developed financial markets hold financial assets from developed regions, leading to a decline in real interest rates, and bubbles form in asset markets including commodities.

“Since commodity producers are assumed to be located in the region with less developed financial markets, producers are forced to hold financial assets from the developed region as a store of wealth, which leads to a decline in real interest rates in this region.Bubbles form in asset markets, including commodity markets, in response to the decline in real interest rates.”

• cites Caballero, Farhi, and Gourinchas (2008) sourceNot checked yet

  Not checked in the free run.

May combine two claims.

Futures contracts are finite-horizon instruments with virtually no constraints on short-sales, which eliminate the potential for a bubble in theoretical models if other assumptions hold.

“Specifically, futures contracts are finite-horizon instruments with virtually no constraints on short-sales, which eliminate the potential for a bubble in theoretical models (if the other assumptions listed above hold).”

• AssumptionThe authors state this as an assumption: The other conditions for rational asset pricing (infinite traders, rational beliefs, common priors, efficient allocation) hold in commodity futures markets.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

The evidence provided by Masters is limited to anecdotes and the temporal correlation between money flows and prices.

“However, the evidence provided by Masters is limited to anecdotes and the temporal correlation between money flows and prices.”

May combine two claims.

There are few limitations to arbitrage in commodity futures markets because trading costs are low, trades can be executed by the second, and prices are highly transparent.

“There are few limitations to arbitrage in commodity futures markets, because the cost of trading is relatively low, trades can be executed literally by the second, and prices are highly transparent.”

Probably not a substantial claim: may not pass S3 (load-bearing).

The economic damage from an asset pricing bubble may be extensive because the market provides false signals about value.

“The economic damage from an asset pricing bubble may be extensive since the market provides false signals about value.”

Probably not a substantial claim: may not pass S3 (load-bearing).

Bubbles can occur with large-scale entry of unsophisticated noise traders who have mistaken beliefs about future income streams.

“For example, bubbles can occur with the large-scale entry of unsophisticated “noise” traders who have mistaken beliefs about their prospects for future income streams.”

May combine two claims.

Gilbert's tests using daily data indicate bubbles in seven of nine markets, but for a small percentage of days.

“Tests using daily data indicate bubbles in seven of the nine markets, but for a surprisingly small percentage of the days in the sample.”

• cites Gilbert (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

The bubble in that model is ultimately fed only by global imbalances in the supply of liquid and safe financial assets.

“The bubble is ultimately fed only by global imbalances in the supply of liquid and safe financial assets.”

• cites Caballero, Farhi, and Gourinchas (2008) sourceNot checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Hamilton (2009b) develops a formal model of price determination in the crude oil market that generates specific theoretical conditions for speculative impact.

“Hamilton (2009b) develops a formal model of price determination in the crude oil market that generates specific theoretical conditions for speculative impact”

• cites Hamilton (2009b)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

If noise traders behave predictably, there is no noise trader risk, and asset pricing bubbles cannot occur.

“However, if noise traders behave in a predictable fashion, there is no noise trader risk, and asset pricing bubbles cannot occur.”

Probably not a substantial claim: may not pass S3 (load-bearing).

Gilbert (2009) examines price behavior in crude oil futures, three metals futures, and three agricultural futures over 2006-2008.

“Gilbert (2009) examines price behavior in crude oil futures, three metals futures, and three agricultural futures over 2006-2008.”

• cites Gilbert (2009)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim.

If the magnitude of index fund demand is large enough relative to physically-constrained supplies in the short-run, prices and price volatility can increase sharply.

“If the magnitude of index fund demand is large enough relative to physically-constrained supplies in the short-run, prices and price volatility can increase sharply.”

Probably not a substantial claim: may not pass S3 (load-bearing).

A key prediction of that model is that commodity inventories accumulate during the building phase of the price bubble.

“Once again, a key prediction of this model is that commodity inventories accumulate during the building phase of the price bubble.”

• cites Caballero, Farhi, and Gourinchas (2008) sourceNot checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Gilbert does not interpret index investment as a fundamental cause of the food price boom, but as the channel by which rapid Chinese economic growth and dollar depreciation affected food prices.

“However, Gilbert does not interpret index investment as a fundamental cause of the food price boom, but instead it is viewed as the channel by which the main drivers -rapid Chinese economic growth and dollar depreciationaffected the price of food.”

• cites Gilbert (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

The structural econometric results of Caballero, Farhi, and Gourinchas should be interpreted cautiously because the sample period is very short for estimating such a model.

“the sample period is very short for estimating a structuraltype econometric model (which the author acknowledges).”

• cites Caballero, Farhi, and Gourinchas 2008 sourceNot checked yet

  Not checked in the free run.

May combine two claims.

Tang and Xiong state that growing index investor presence caused financialization, making commodity prices more correlated with financial asset prices and with one another.

“The increasing presence of index investors in commodities markets precipitated a fundamental process of financialization amongst the commodities markets, through which commodity prices now become more correlated with the prices of financial assets and each other”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Basic storage theory predicts that low inventories produce both a rising commodity price and an increasing marginal convenience yield.

“The basic theory of storage predicts that low inventories lead to a rising commodity price and an increasing marginal convenience yield (Working 1948;1949).”

• cites Working 1948;1949Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim. May combine two claims.

Tang and Xiong acknowledge that rising correlations could reflect several factors and use a difference-in-difference approach to address identification.

“Tang and Xiong recognize that increasing correlations could be due to a variety of factors, such as the financial shocks associated with the recent recession and the increasing impact of crude oil prices on many commodities (e.g., de Gorter and Just 2010), and address this”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

• cites de Gorter and Just 2010Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim.

Gilbert presents no evidence whether this is a reasonable assumption.

“Gilbert (2009) presents no evidence whether this is a reasonable assumption or not.”

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

The Caballero, Farhi, and Gourinchas model treats index investment as wholly speculative, which is a controversial assumption.

“the model implicitly assumes that index investment is entirely speculative, certainly a controversial assumption.”

• cites Caballero, Farhi, and Gourinchas 2008 sourceNot checked yet

  Not checked in the free run.

May combine two claims.

Although those differences are generally statistically significant, their economic importance is debatable.

“While these differences generally are statistically significant, the economic significance of such small differences is debatable.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Little is known about how sensitive the Caballero, Farhi, and Gourinchas estimates are to alternative variable specifications.

“there is little information about the sensitivity of estimation results to alternative specifications of the variables included in the model.”

• cites Caballero, Farhi, and Gourinchas 2008 sourceNot checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

This is another form of the argument that underlying macro forces created a bubble in commodity prices rather than index funds per se.

“This is another form of the argument that underlying “macro” forces created a bubble in commodity prices rather than index funds per se (Caballero, Farhi, and Gourinchas 2008).”

• cites Caballero, Farhi, and Gourinchas 2008 sourceNot checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Tang and Xiong argue that commodity markets were not fully integrated with financial markets before commodity index investments developed.

“they argue that commodity markets were not fully integrated with financial markets prior to the development of commodity index investments”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim.

Gilbert applies this index to energy and metals markets not included in the index.

“Gilbert (2009) then applies this index not only to three of the agricultural markets included in the index, but also to the energy and metal markets not included in the index.”

• cites Gilbert (2009)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim. May combine two claims.

Gilbert's quantum index is a weighted average of index trader positions in agricultural futures markets, with weights being nearest-to-expiration futures prices on the first date of his sample.

“The second reason is related to the index of commodity index fund activity used by Gilbert (2009); his quantum index is a weighted average of index trader positions in agricultural futures markets (as reported in the CFTC's CIT report).The weights are nearest-to-expiration futures prices on the first date of his sample.”

• cites Gilbert (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Gilbert (2010) argues that agricultural price booms are better explained by common demand-side factors than individual market supply-side factors.

“Gilbert (2010) investigates the factors driving the 2007-2008 increase in food prices; he argues that agricultural price booms are better explained by common demand-side factors than individual market supply-side factors.”

• cites Gilbert (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Tang and Xiong conclude that index investment has increasingly affected commodity futures prices, though not in a bubble manner.

“leading the authors to conclude that index investment has increasingly impacted commodity futures prices (although in a non-bubble manner).”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Einloth found that marginal convenience yield rose for most of the crude oil futures price increase up to $100 per barrel but fell as crude oil rose from about $100 to $140 per barrel.

“finds that marginal convenience yield (derived from differences between futures prices) rose for most of the increase in crude oil futures prices up to $100/barrel, but fell as crude oil increased from about $100 to $140/barrel.”

• cites Einloth (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Einloth created a bubble test using the joint behavior of convenience yields and prices in storable commodity futures.

“Einloth (2009) devises a test of bubbles based on the joint behavior of convenience yields and prices in a storable commodity futures market.”

• cites Einloth (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S1 (asserted).

Tang and Xiong test whether the post-2004 rise in correlations with stock, bond, dollar, and crude oil returns is larger for commodities in major indices than for non-index commodities.

“they test whether the increase in correlation of commodity futures returns with stock, bond, U.S. dollar, and crude oil returns post-2004 is greater for commodities included in major indices (such as the-S&P-GSCI) compared to commodities not included in the indices.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Gilbert did not find evidence of a relationship between index fund activity in agricultural markets, upon which the index is based, but did find evidence in energy and metals markets, which are not included in the index.

“This point is reinforced by noting that he did not find evidence of a relationship between index fund activity in agricultural markets, upon which the index is based, but did find evidence in energy and metals markets, which are not included in the index.”

• cites Gilbert (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

Gilbert (2010) estimates model parameters using monthly data from March 2006 to June 2009, which indicate a large and statistically significant impact of commodity index investment on the food price index.

“Gilbert (2010) estimates model parameters using monthly data from March 2006 to June 2009, which indicate a large and statistically significant impact of commodity index investment on the food price index.”

• cites Gilbert (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

Problems in rejecting the null in Granger causality tests include expectations, omitted third variables, and unclear meaning of non-zero correlation without explicit theory.

“i) economic agents' expectations about the future can make it appear as if there is a relationship between two variables when in fact there is none; ii) the apparent causal relationship between two variables may actually be the result of a third variable omitted from the analysis; and iii) without an explicit theory that establishes a link between two variables, the meaning of a non-zero corre”

• cites Newbold (1982)Not checked yet

  Not checked in the free run.

May combine two claims.

The non-index control markets in some sectors are unrepresentative; in grains, two of four are rough rice and oats, both thinly traded and illiquid.

“Two of the four non-index markets in the grain sector are rough rice and oats futures, both of which are thinly-traded and illiquid markets.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

That pattern can arise if the probability of a sequence of large positive demand shocks or negative supply shocks rises substantially.

“This could occur if the probability of a sequence of large positive demand shocks or negative supply shocks increases substantially.”

• cites Routledge, Seppi, and Spatt ( 2000)Not checked yet

  Not checked in the free run.

May combine two claims.

Daily soybean and crude oil futures return correlation was between .10 and .20 before 2004 and then climbed to about .60 by 2009.

“the correlation of daily soybean and crude oil futures returns before 2004 moved in a narrow range between .10 and 0.20, but after 2004 increased steadily to a peak of about 0.60 in 2009.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing), S4 (based).

That would have required many sophisticated traders to conclude that index fund investors held valuable information they lacked.

“Of course, this would have required a large number of sophisticated and experienced traders in commodity futures markets to reach the conclusion that index fund investors possessed valuable information that they themselves did not possess.”

Probably not a substantial claim: may not pass S3 (load-bearing).

The second logical inconsistency is the claim that index funds raised both futures and cash prices even though they traded only futures.

“The second possible logical inconsistency of the bubble story is in the argument that index fund investors artificially raised both futures and cash commodity prices when they only participated in futures markets.”

May combine two claims.

Bjornson and Carter studied seven commodity futures markets from 1969 to 1994 and found lower expected returns when interest rates, expected inflation, and growth were high, concluding commodities hedge business cycles.

“Bjornson and Carter (1997) examine seven commodity futures markets from 1969-1994, and find that expected returns are lower during times of high interest rates, expected inflation, and economic growth, leading the authors to conclude that commodities provide a natural hedge against business cycles.”

• cites Bjornson and Carter (1997)Not checked yet

  Not checked in the free run.

May combine two claims.

The only two non-index markets in soft commodities are lumber and orange juice, which are also illiquid.

“The same can be said of the only two non-index markets in the soft commodity sector, lumber and orange juice.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Index investors only use futures, do not buy or hoard the cash commodity, and any causal link from their futures activity to cash prices is unclear.

“Index investors are purely involved in a financial transaction using futures markets; they do not engage in the purchase or hoarding of the cash commodity and any causal linkages between their futures market activity and cash prices is unclear at best.”

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

The counter-arguments can be grouped into three logical inconsistencies in the bubble argument and four ways the bubble story conflicts with observed facts.

“We categorize these into three logical inconsistencies in the arguments made by bubble proponents and four instances where the bubble story is not consistent with observed facts.”

Classified as probably not a substantial claim.

The sequential procedure uses Dickey-Fuller unit-root tests against mildly explosive alternatives that characterize a bubble.

“the sequential procedure uses standard tests (Dickey-Fuller t tests) for unit root behavior in prices against”

• cites Phillips and Yu (2010)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim.

Phillips and Yu introduced a recursive test for bubble characteristics in financial time series.

“Phillips and Yu (2010) introduce a new recursive test for bubble characteristics in financial time series.”

• cites Phillips and Yu (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Hamilton notes that bubble-induced above-ground inventory buildup could be too small to detect if demand elasticity is very small or zero.

“Hamilton (2009b) notes that the buildup of (above-ground) inventories due to a price bubble could be so small that it is not easily detected if the elasticity of demand for the storable commodity is very small or zero.”

• cites Hamilton (2009b)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

The third logical inconsistency is the blanket labeling of speculators, especially index funds, as wrongdoers and hedgers as victims.

“A third possible logical inconsistency of the bubble argument is the blanket categorization of speculators, particularly index fund speculators, as wrongdoers, and hedgers as victims of their actions.”

May combine two claims.

Stoll and Whaley report that CBOT, KCBOT, and MGEX wheat returns were highly correlated from 2006 to 2009, though only CBOT and KCBOT wheat were heavily used by index investors.

“Stoll and Whaley (2010) report that returns for CBOT wheat, KCBOT wheat, and Minneapolis Grain Exchange (MGEX) wheat are all highly positively correlated from 2006-2009, yet only CBOT and KCBOT wheat are used heavily by index investors.”

• cites Stoll and Whaley (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

The recursive procedure can time-stamp a bubble's start and end and can be applied in real time to identify a forming bubble.

“The recursive procedure is powerful in the sense that it allows for the”

• cites Phillips and Yu (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

The second factual inconsistency is that if index fund buying raised prices, markets without index investment should not have advanced.

“The second factual inconsistency of the bubble story is that if index fund buying drove commodity prices higher, then markets without index fund investment should not have seen a price advance.”

May combine two claims.

In reality, the bad actor is not easily identified because hedgers sometimes speculate and speculators sometimes hedge.

“In reality, the”

May combine two claims.

Other studies indicate that commodity futures markets have been integrated with financial markets for decades, which contradicts Tang and Xiong's central thesis.

“several other studies indicate that commodity futures markets have been integrated with financial markets for decades, contradicting Tang and Xiong's basic thesis.”

• cites Bjornson and Carter (1997)Not checked yet

  Not checked in the free run.

• cites Hong and Yogo (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

Skeptical economists cite contrary facts and argue that fundamental factors drove commodity prices higher.

“These economists cite several contrary facts and argue that commodity markets were driven by fundamental factors that pushed prices higher.”

• cites Krugman 2008Not checked yet

  Not checked in the free run.

• cites Pirrong 2008Not checked yet

  Not checked in the free run.

• cites Sanders and Irwin 2008Not checked yet

  Not checked in the free run.

May combine two claims.

The reviewed studies refute the argument that there is no evidence of either a commodity futures bubble or a relationship between index investment and futures price movements.

“Results in these studies also negate the argument that no evidence exists of a bubble in commodity futures prices or a relationship between commodity index investment and movements in commodity futures prices.”

Probably not a substantial claim: may not pass S2 (checkable), S3 (load-bearing). May combine two claims.

Phillips and Yu's findings are interesting and among the more convincing evidence of bubble-like activity in energy prices.

“The findings of Phillips and Yu (2010) are certainly interesting and represent some of the more convincing evidence of bubble-like activity in energy prices.”

• cites Phillips and Yu (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

In livestock, the sole non-index market is pork bellies, a dead market with near-zero open interest.

“The most egregious example is in the livestock sector, where the sole non-index market is pork bellies.This is, for all intents and purposes, a dead market with close to zero open interest.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Caballero, Farhi, and Gourinchas argue that exhaustible-resource inventory includes un-extracted oil, so below-ground increases could offset measured above-ground declines.

“Caballero, Farhi, and Gourinchas (2008) argue that inventory for an exhaustible resource like crude oil includes un-extracted oil in the ground and it is possible that the below-ground rise in inventory more than offset the above-ground (measured) decline in inventory.”

• cites Caballero, Farhi, and Gourinchas (2008) sourceNot checked yet

  Not checked in the free run.

Classified as probably not a substantial claim. May combine two claims.

Pirrong reports that shipping service prices rose sharply from June 2007 to July 2008 along with other commodity prices, which he says contradicts the bubble story because shipping is nonstorable.

“Pirrong (2010) reports that the price of shipping services increased dramatically between June 2007 and July 2008 in concert with other commodity prices, which, he argues, contradicts the bubble story since shipping services are nonstorable and therefore should not be susceptible to asset bubble influences.”

• cites Pirrong (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Irwin, Sanders, and Merrin show that markets without index participation and commodities without futures also had price increases during 2006-2008.

“Irwin, Sanders, and Merrin (2009) show that markets without index fund participation (fluid milk and rice futures) and commodities without futures markets (apples and edible beans) also showed price increases during the 2006-2008period.”

• cites Irwin, Sanders, and Merrin (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Other traders might have read large long index fund order flow as valuable private information and raised their own demands, pushing prices higher.

“it is possible that other traders in commodity futures markets interpreted the large order flow of index funds on the long side of the market as a reflection of valuable private information about commodity price prospects, which would have had the effect of driving prices higher as these traders revised their own demands upward.”

Classified as probably not a substantial claim.

Uninformed trades can move prices if informed traders mistake noise for valuable information about fundamentals.

“The trades of uninformed participants can impact prices in this more realistic model if informed traders mistakenly believe that trades made by uninformed participants (”

• cites Grossman 1986 sourceNot checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S1 (asserted).

Following Caballero, Farhi, and Gourinchas, Phillips and Yu hypothesize that global liquidity imbalances drove bubbles migrating from technology stocks to housing, subprime mortgages, commodities, and eventually bonds.

“Following Caballero, Farhi, and Gourinchas (2008), the authors hypothesize that global liquidity imbalances drove a series of financial bubbles that migrated from technology stocks to housing, on to subprime mortgages, and then into commodity markets and eventually the bond market (after the subprime crises broke).”

• cites Caballero, Farhi, and Gourinchas (2008) sourceNot checked yet

  Not checked in the free run.

• cites Phillips and Yu (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Stoll and Whaley observe that COMEX gold, COMEX silver, NYMEX palladium, and NYMEX platinum futures were highly correlated over the same period, but only gold and silver were in popular indices.

“Stoll and Whaley also observe that Commodity Exchange (COMEX) gold, COMEX silver, New York Mercantile (NYMEX) palladium, and NYMEX platinum futures prices are highly correlated over the same time period, but only gold and silver are included in popular commodity indices.”

• cites Stoll and Whaley (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

Futures contracts are pure bets with a long for every short, making commodity futures markets zero-sum.

“Futures contracts are”

• cites Black 1976Not checked yet

  Not checked in the free run.

May combine two claims.

Volatility is forecast by swap dealer positions in crude oil and natural gas and by other speculators in all markets except corn.

“Second, volatility is forecast by swap dealer positions in crude oil and natural gas and by other speculators in all markets except corn.”

• cites Brunetti and Buyuksahin (2009)Not checked yet

  Not checked in the free run.

May combine two claims.

Measurement error from using swap dealer positions as index fund positions in crude oil may be substantial and may limit conclusions from studies such as Buyuksahin and Harris.

“Hence, the measurement error inherent in using swap dealer positions to represent index fund positions in crude oil futures may be substantial and could limit the conclusions that can be drawn from studies like Buyuksahin and Harris.”

• cites Buyuksahin and Harris (2009)Not checked yet

  Not checked in the free run.

• cites CFTC 2008Not checked yet

  Not checked in the free run.

May combine two claims.

A 2008 CFTC report says swap dealer netting in crude oil is substantial, with only 41% of long swap dealer positions in crude oil futures on three dates in 2007 and 2008 tied to long-only index funds.

“A 2008 CFTC report indicates that swap dealer netting is substantial in crude oil, with only 41% of long swap dealer positions in crude oil futures on three dates in 2007 and 2008 linked to long-only index fund positions (CFTC 2008).”

• cites CFTC 2008Not checked yet

  Not checked in the free run.

May combine two claims.

Buyuksahin and Harris show that the crude oil futures T-index rose with prices from 2004 to 2009, but its peak remained within historical norms.

“Buyuksahin and Harris (2009) use daily data from the CFTC's internal large trader database to show that Working's T-index in the crude oil futures market increased in parallel with crude oil prices from 2004-2009, but the peak of the index was still well within historical norms.”

• cites Buyuksahin and Harris (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Using swap dealer positions to represent index fund investment is a potential limitation of Brunetti and Buyuksahin's study.

“Once again, the use of swap dealer positions to represent index fund investment is a potential limitation of this study.”

• cites Brunetti and Buyuksahin (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

Buyuksahin and Harris assume swap dealer positions reflect index investing and interpret their swap dealer results as failure to reject no relation between crude oil futures prices and index fund trading.

“Buyuksahin and Harris assume that swap dealer positions are linked to commodity index investing, and hence, the results for swap dealers are interpreted as a failure to reject the null hypothesis of no relation between crude oil futures prices and index fund trading.”

• cites Buyuksahin and Harris (2009)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S1 (asserted).

A key question is whether swap dealer positions in crude oil futures reasonably reflect total effective index investor demand.

“A key question, then, is whether it is reasonable to assume that swap dealer positions in crude oil futures accurately reflect the total effective”

May combine two claims.

Brunetti and Buyuksahin's VAR Granger tests find that returns are not forecast by any trader group's positions in five markets, except mini-DOW futures where hedge funds dampen.

“First, returns are not forecast by positions of any trader group in the five markets, including swap dealers, with the exception of mini-DOW futures, where there is evidence of a dampening impact of hedge funds.”

• cites Brunetti and Buyuksahin (2009)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim. May combine two claims.

Because the volatility impact is negative, Brunetti and Buyuksahin argue speculators reduce risk and lower hedging costs.

“Since the impact is negative, Brunetti and Buyuksahin argue that speculators reduce risk in the futures market and therefore lower the cost of hedging.”

• cites Brunetti and Buyuksahin (2009)Not checked yet

  Not checked in the free run.

May combine two claims.

Irwin, Sanders, and Merrin find the opposite: the highest index fund concentration was often in livestock markets, which had the smallest price increases through spring 2008.

“But Irwin, Sanders, and Merrin (2009) find just the opposite when comparing grain and livestock futures markets.The highest concentration of index fund positions was often in livestock markets, which had the smallest price increases through the spring of 2008.”

• cites Irwin, Sanders, and Merrin (2009)Not checked yet

  Not checked in the free run.

May combine two claims.

Nine reviewed studies provide no empirical evidence of a bubble or of a statistical link between index fund activity and commodity futures price movements.

“We review here nine studies that do not provide empirical evidence of a bubble and/or a statistical linkage between index fund activity and commodity futures price movements.”

Probably not a substantial claim: may not pass S4 (based).

One would expect markets with the greatest concentration of index fund positions to have the largest price increases.

“In other words, one would expect markets with the highest concentration of index fund positions to show the largest price increases.”

Classified as probably not a substantial claim.

Media and hearing statistics on long-only index fund trading tend to assess speculation in isolation by absolute position size and activity.

“The statistics on long-only index fund trading reported in the media and discussed at hearings tend to view speculation in a vacuum focusing on absolute position size and activity.”

Classified as probably not a substantial claim. May combine two claims.

Working argued that speculation must be judged relative to hedging needs and can be excessive only relative to hedging activity.

“Working (1960) argued that speculation must be gauged relative to hedging needs.In particular, speculation can only be considered”

• cites Working (1960)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Tang and Xiong point out that the relative size of price increases for index and non-index storable commodities matters regardless of whether non-index commodities rose.

“Tang and Xiong (2010) point out that the relative magnitude of price increases for index and nonindex (storable) commodities is relevant whether or not non-index commodities increased in price.”

• cites Tang and Xiong (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S1 (asserted), S2 (checkable), S3 (load-bearing).

Whether netted or non-netted positions are more relevant is an empirical question.

“Whether netted or non-netted positions are more relevant is an empirical question.”

Probably not a substantial claim: may not pass S3 (load-bearing).

Irwin and Sanders test the Masters Hypothesis using the quarterly Index Investment Data report.

“Irwin and Sanders (2010) conduct a test of the”

• cites Irwin and Sanders (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

After Lehman Brothers collapsed in September 2008, the correlation spiked to 0.70 and stayed historically high until March 2010.

“Almost immediately after the collapse of Lehman Brothers in September 2008, the correlation spiked as high as 0.70 and remained at historically high levels until March 2010.”

• cites Buyuksahin and Robe (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

They argue the net position may still matter for price impacts because it is the position actually taken to the futures market.

“However, they argue that the net position may still be relevant with respect to price impacts since this is the position actually taken to the commodity futures market.”

• cites Sanders and Irwin (2010c)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim.

A cross-sectional regression is applied to IID data from Q1 2008 through Q1 2010, covering the rapid rise, peak, and decline in commodity prices.

“A cross-sectional regression test is applied to the IID data over the first quarter of 2008 through the first quarter of 2010, which captures the rapid increase, peak, and subsequent decline in commodity prices.”

• cites Irwin and Sanders (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

A cross-sectional approach likely improves power over time-series Granger tests, and a quarterly horizon should better capture slowly accumulating price pressure if present.

“A cross-sectional approach is likely to improve statistical power compared to time-series Granger-type tests (Sanders and Irwin 2010a) and a quarterly horizon should better capture a slowly accumulating price pressure effect if it is present in the data.”

• cites Sanders and Irwin 2010aNot checked yet

  Not checked in the free run.

May combine two claims.

In 2 of the 3 significant cases, the sign is negative, contradicting the claim that index investment raises returns or volatility.

“2 of the 3 significant cases have negative signs that contradict the claim that index investment increases returns or volatility.”

Probably not a substantial claim: may not pass S3 (load-bearing). May combine two claims.

Although index positions statistically lead to lower volatility, Sanders and Irwin note that trader positions might coincide with another fundamental variable actually causing the lower volatility.

“While index positions lead to lower volatility in a statistical sense, Sanders and Irwin (2010c) note that it is possible that trader positions coincide with some other fundamental variable that is actually causing the lower market volatility”

• cites Sanders and Irwin (2010c)Not checked yet

  Not checked in the free run.

• cites Newbold (1982)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

Sanders and Irwin recognize that swap dealer positions may imperfectly proxy overall index investments because of internal OTC netting, especially in energy futures.

“Sanders and Irwin (2010c) are also aware that swap dealer positions may be an imperfect proxy for overall index investments due to internal netting of OTC positions by swap dealers, particularly in the energy futures markets.”

• cites Sanders and Irwin (2010c)Not checked yet

  Not checked in the free run.

May combine two claims.

IID data better measure index investment because positions are measured before swap dealer netting and cover all agricultural, energy, metal, and soft commodity futures markets.

“The IID data is not only a better measure of index investment because positions are measured before internal netting by swap dealers, it also covers the complete spectrum of agricultural, energy, metal and soft commodity futures markets.”

• cites Irwin and Sanders (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S3 (load-bearing).

It is unknown whether Stoll and Whaley's results generalize to a broader set of commodity futures markets, especially energy futures.

“However, it is not known whether their results generalize to a broader set of commodity futures markets, especially energy futures markets that have been at the center of the current controversy.”

• cites Stoll and Whaley (2010)Not checked yet

  Not checked in the free run.

Probably not a substantial claim: may not pass S1 (asserted), S3 (load-bearing).

It remains unclear how well CIT data represent actual index investment in agricultural markets.

“Finally, there is the question of the degree to which the CIT data represents actual index investment in agricultural markets.”

• cites Stoll and Whaley (2010)Not checked yet

  Not checked in the free run.

Classified as probably not a substantial claim.

Because their short-run elasticity estimates are substantially larger than zero, Kilian and Murphy conclude speculation did not play a major role in the crude oil price run-up.

“Since the short-run elasticity estimates are substantially larger than zero (in absolute terms), Kilian and Murphy conclude that speculation did not play a major role in the run-up in crude oil prices.”

• cites Kilian and Murphy (2010)Not checked yet

  Not checked in the free run.

May combine two claims.

The findings hold whether index fund positions are combined on- and off-exchange, whether swap dealer positions are netted or not, and when individual ETF positions are used.

“Of particular note is the robustness of the results across combined on-and off-exchange index fund positions, netted or non-netted swap dealer positions, and individual ETF positions.”