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Abstract

Recent accusations against speculators in general and long-only commodity index funds in particular, include: increasing market volatility, distorting historical price relationships, and fueling a rapid increase and decrease in commodity inflation. Some researchers have argued that these market participants—through their impact on market prices—may inadvertently prevented the efficient distribution of food aid to deserving groups. Certainly, this result—if substantiated— would counter the classical argument that speculators make prices more efficient and thus improve the economic efficiency of the agricultural and food marketing system. Given the very important policy implications, it is crucial to develop a more thorough understanding of long-only index funds and their potential market impact. Here, we review the criticisms (and rebuttals) levied against (and for) commodity index funds in recent U.S. Congressional testimonies. Then, additional empirical evidence is added regarding cross-sectional market returns and the relative levels of long-only index fund participation in 12 commodity futures markets. The results suggest that index fund positions across futures markets have no impact on relative price changes across those markets. The empirical results provide no evidence that long-only index funds impact commodity futures prices.

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