Trading Practices and Price Dynamics in Commodity Markets and the Stabilising Effects of a Transaction Tax

Movements of commodity prices like the prices of crude oil, corn, wheat and rice are to a substantial extent lengthened and strengthened by speculation in the respective futures markets. In particular the widespread use of technical trading systems reinforces the trending behaviour of commodity prices. The impact of these trading practices on price overshooting was particularly pronounced during the recent commodity price boom. These conclusions can be derived from the performance of 1,092 trading systems in the futures markets for crude oil, corn, wheat and rice between 1989 and mid-2008 as well as from the impact of the aggregate trading behaviour of these models on the simultaneous and subsequent price movements. It is highly plausible that a financial transaction tax would dampen the volatility of commodity prices.