Limitations of Granger Causality Analysis to assess the price effects from the financialization of agricultural commodity markets under bounded rationality

Modern agricultural commodity markets are simultaneously governed by a physical and a financial market element. Whether financial “index trading” activity influences price levels on the futures markets has been investigated by empirical studies using Granger Causality Analysis. A critical review of these studies reveals inconclusive results. Based on sensitivities of the method, reasons for limited interpretability of results may be omitted determinants of financial trading activity, failure to consider the informational efficiency of markets, time-varying and feedback effects of boundedly rational heterogeneous trading strategies and limitations in specifying adequate theoretical variables from existing data.

Heckelei, Thomas
Issue Date:
Feb 07 2012
Publication Type:
Working or Discussion Paper
Record Identifier:
PURL Identifier:
Total Pages:
JEL Codes:
C18; Q13; Q02
Series Statement:
Agricultural and Resource Economics, Discussion Paper

 Record created 2017-04-01, last modified 2018-01-22

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