Regulating excessive speculation: commodity derivatives and the global food crisis

Evidence suggests that commodity derivatives speculation contributed to extraordinary patterns of grain price volatility that led to a global food crisis in 2007–11. People in countries throughout the world are increasingly dependent on international commodity markets for access to food. Almost everywhere, now, the value of food is determined by a single condensed symbol of its worth—its price. Persuaded of the need to ensure that this measure of value is not put at risk of distortion in the pursuit of financial profit, governments in the US and in the EU are now implementing new regulations designed to curb ‘excessive’ levels of speculation in derivative markets. Carrying out an analysis of these regulatory measures, the article demonstrates that both sets of reforms suffer from a critical limitation: They are predicated on an inaccurate understanding of how activity in commodity derivative markets can impact on underlying food prices. If the new regulations for commodity derivative markets are not up to the task, as this article argues that they are not, a more fundamental revision of global economic structures may be required if the basic needs of human beings are not to be subsumed to the interests of financial capital in the years to come

Technical analysis in the foreign exchange market

This article introduces the subject of technical analysis in the foreign exchange market, with emphasis on its importance for questions of market efficiency. Technicians view their craft, the study of price patterns, as exploiting traders’ psychological regularities. The literature on technical analysis has established that simple technical trading rules on dollar exchange rates provided 15 years of positive, risk-adjusted returns during the 1970s and 80s before those returns were extinguished. More recently, more complex and less studied rules have produced more modest returns for a similar length of time. Conventional explanations that rely on risk adjustment and/or central bank intervention are not plausible justifications for the observed excess returns from following simple technical trading rules. Psychological biases, however, could contribute to the profitability of these rules. We view the observed pattern of excess returns to technical trading rules as being consistent with an adaptive markets view of the world.Foreign exchange rates

Asset Management in Volatile Markets

The 27th SUERF Colloquium in Munich in June 2008: New Trends in Asset Management: Exploring the Implications was already topical in the Summer of 2008. The subsequent dramatic events in the Autumn of 2008 made the presentations in Munich even more relevant to investors and bankers that want to understand what happens in their investment universe. In the present SUERF Study, we have collected a sample of outstanding colloquium contributions under the fitting headline: Asset Management in Volatile Markets.derivatives, financial innovation, asset management, finance-growth-nexus; Relative Value Strategy, Pair Trading, Slippage, Implementation Shortfall, Asset Management, Fin4Cast

Heavy-Tailed Features and Empirical Analysis of the Limit Order Book Volume Profiles in Futures Markets

This paper poses a few fundamental questions regarding the attributes of the volume profile of a Limit Order Books stochastic structure by taking into consideration aspects of intraday and interday statistical features, the impact of different exchange features and the impact of market participants in different asset sectors. This paper aims to address the following questions: 1. Is there statistical evidence that heavy-tailed sub-exponential volume profiles occur at different levels of the Limit Order Book on the bid and ask and if so does this happen on intra or interday time scales ? 2.In futures exchanges, are heavy tail features exchange (CBOT, CME, EUREX, SGX and COMEX) or asset class (government bonds, equities and precious metals) dependent and do they happen on ultra-high (<1sec) or mid-range (1sec -10min) high frequency data? 3.Does the presence of stochastic heavy-tailed volume profile features evolve in a manner that would inform or be indicative of market participant behaviors, such as high frequency algorithmic trading, quote stuffing and price discovery intra-daily? 4. Is there statistical evidence for a need to consider dynamic behavior of the parameters of models for Limit Order Book volume profiles on an intra-daily time scale ? Progress on aspects of each question is obtained via statistically rigorous results to verify the empirical findings for an unprecedentedly large set of futures market LOB data. The data comprises several exchanges, several futures asset classes and all trading days of 2010, using market depth (Type II) order book data to 5 levels on the bid and ask

Statistical evidence of tax fraud on the carbon allowances market

The aim of this paper is to show evidence and to quantify with forensic econometric methods the impact of the Value Added Tax fraud on European carbon allowances markets. This fraud mainly occurred at the beginning of between the end of 2008 and the beginning of 2009. In this paper, we explore the financial mechanisms of the fraud and the impact on the market behavior as well as the reflexion on its econometric features. In a previous work, we showed that the European carbon market is strongly influenced by fundamentals factors as oil, energy, gas, coal and equity prices. Therefore, we calibrated Arbitrage Pricing Theory-like models and showed that they have a good forecast capacity. Those models enabled us to quantify the impact of each factor on the market. In this study, we focused more precisely on the benchmark contract for European carbon emissions prices over 2008 and 2009. We observed that during the first semester of 2009, there is a significant drop in our model performances and robustness and that the part of market volatility explained by fundamentals reduced. Therefore, we identified the period where the market was driven by VAT fraud movements and we were able to measure the value of this fraud. Soon after governments passed a law that cut the possibility of fraud occurrence the performance of the model improved rapidly. We estimate the impact of the VAT extortion on the carbon market at 1.3 billion euros.Carbon, EUA, energy, Arbitrage Pricing Theory, Switching regimes, hidden Markov Chain Model, forecast.

Conflicts of interest in self-regulation : can demutualized exchanges successfully manage them?

The author examines the implications of demutualization of financial exchanges for their roles as self-regulatory organizations. Many regulators and exchanges believe that conflicts of interest increase when exchanges convert to for-profit businesses. Demutualization also changes the nature of an exchange's regulatory role as broker-dealers'ownership interests are reduced. These factors are leading to reduced regulatory roles for exchanges in many jurisdictions. The resulting changes have significant implications for regulation of financial markets, especially as exchanges are the only self-regulating organizations (SROs) in most countries. Major changes in the role of exchanges require a rethinking of the allocation of regulatory functions and the role of self-regulation, as well as stronger mechanisms to mitigate conflicts of interest. Carson looks at the views of both exchanges and regulators on these issues in Asian, European, and North American jurisdictions where major exchanges have converted to for-profit businesses. He finds that views on the conflicts of interest faced by demutualized exchanges vary widely. In addition, the tools and processes used by exchanges and regulators to manage conflicts also differ significantly across jurisdictions. The author concludes that new and greater conflicts result from demutualization and canvasses the regulatory responses in the jurisdictions examined.Economic Theory&Research,Payment Systems&Infrastructure,Non Bank Financial Institutions,International Terrorism&Counterterrorism,Environmental Economics&Policies,International Terrorism&Counterterrorism,Non Bank Financial Institutions,Environmental Economics&Policies,Insurance&Risk Mitigation,Economic Theory&Research

Unit Root Properties of Crude Oil Spot and Futures Prices

In this paper we examine whether WTI and Brent crude oil spot and futures prices (at one, three and six months to maturity) contain a unit root with one and two structural breaks, employing weekly data over the period 1991-2004. To realize this objective we employ Lagrange Multiplier (LM) unit root tests with one and two endogenous structural breaks proposed by Lee and Stazicich (2003, 2004). We find that each of the oil price series can be characterized as a random walk process and that the endogenous structural breaks are significant and meaningful in terms of events that have impacted on world oil markets.Crude oil prices, Unit root, Stationarity

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