Commodity Returns and Their Volatility in Relation to Speculation: A Consistent Empirical Approach

Granger causality (GC) tests are widely used to empirically address the dynamic relationship between speculative activities and pricing on commodity markets. However, the sheer number of studies and their heterogeneity makes it extremely difficult—if not impossible—to compare their results and to derive meaningful conclusions. This is the main objective of this article, which analyzes a consistent dataset with a homogeneous estimation approach. The authors analyze futures returns and volatilities of 28 commodities for three maturities, from January 2006 to March 2015, in relation to three speculation proxies. Overall, they find a larger number of significant GC effects for volatilities than for returns. The volatility effect is mostly negative (i.e., more speculation is followed by lower volatilities). This is particularly true if the Working index is used as a speculation proxy. The majority of destabilizing effects (positive relations), if any, is found in livestock. However, no such effects seem to be present in typical agricultural commodities. Mixed evidence is found for the soft commodities. Apart from statistical significance, the explained variance of returns and volatilities is below 8% and therefore economically small or moderate at best.