Executive Summary

The report was prepared for the OECD by Professors Scott Irwin and Dwight Sanders. It represents a preliminary study which aims to clarify the role of index and swap funds in agricultural and energy commodity futures markets. The full report including the econometric analysis is available in the Annex to this report. While the increased participation of index fund investments in commodity markets represents a significant structural change, this has not generated increased price volatility, implied or realised, in agricultural futures markets. Based on new data and empirical analysis, the study finds that index funds did not cause a bubble in commodity futures prices. There is no statistically significant relationship indicating that changes in index and swap fund positions have increased market volatility. The evidence presented here is strongest for the agricultural futures markets because the data on index trader positions are measured with reasonable accuracy. The evidence is not as strong in the two energy markets studied here because of considerable uncertainty about the degree to which the available data actually reflect index trader positions in these markets. An unexpected finding was a negative relationship between index and swap fund positions and market volatility. That is, there is some evidence that increases in index trader positions are followed by lowe