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Abstract

For a considerable time, long-only index funds have been suspected for being responsible for price increases on agricultural futures markets, particularly those for grain. Utilizing partial equilibrium concepts, we analyze the market impacts of long-only index funds. Our analysis reveals that long-only index funds stabilize the market. The market entry of long-only index funds lowers risk premiums, so farmers can hedge at lower costs. This gives incentives for storage and dampens seasonal price fluctuations on spot markets, which is also in favor of consumers. However, the entry of long-only index funds reduces the profitability of speculation. Thus, there is no need for political action in this particular field.

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