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Policy Brief 206 - Volatility of commodity prices - Part 1 (January 2011)

Policy Brief 206 - Volatility of commodity prices - Part 1 (January 2011)

05/01/11

Price volatility of raw materials - Part 1. For financial market regulation

Contents

  •   The derivatives markets of raw materials led to price volatility of the 2000s?
  •   The fundamentals remain the most plausible explanation of the volatility
  •   Development of financial markets may increase price volatility, although it is not the primary cause

The commodity markets are not an asset market with a difference: these products are essential inputs for the real economy, the evolution of prices has a direct and immediate impact on investment, production or supply , as shown by the price spike of 2007-2008 and more recently the crisis on the Russian wheat.

These markets are therefore subject to special attention from the authorities, who have enrolled in the agenda of the G20 in 2011. Meanwhile, the image of banks has been severely eroded by the subprime crisis, explaining that governments have looked with suspicion their participation in futures markets in commodities, especially since the price increase is or less in droves this segment.

According to economic analysis, price movements of recent years are mainly due to the tension that has existed between stagnating supply and growing demand. The literature on the subject, if it explains the mechanisms at work, provides no evidence of liability of futures markets, especially financial operators in the prices of 2007-2008. Caution is nevertheless a must: the lack of evidence, mainly due to the lack of data, does not mean that these derivatives markets should be immune from review.

It is up to governments and market authorities to find the right balance with regulation to prevent runaway prices while maintaining the evelopment of these markets, essential for hedging purposes and training price expectations.

  •   Authors: Johanne Buba , Department of Sustainable Development and Maxime Liegey , Department of Economics-Finance.

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