Technical Trading and Commodity Price Fluctuations

  • Stephan Schulmeister

The study examines the empirical relevance of two antagonistic hypotheses of commodity price dynamics. The "fundamentalist hypothesis" implies that commodity prices are determined exclusively by supply and demand conditions in spot markets. The "bull-bear hypothesis" assumes that also destabilising speculation plays an important role in the price formation process. The extent of commodity price fluctuations since the late 1980s, in particular the boom 2007-08 and the subsequent bust, can hardly be accounted for by market fundamentals. At the same time, trading volume on commodity derivatives exchanges has been quadrupling since mid-2000s. This increase was probably due to rising speculation, to a great extent based on technical trading systems. This presumption is confirmed by the results of testing the performance of 1,092 technical trading systems in the futures markets for crude oil, corn, wheat and rice. Most of the models would have been profitable not only over the entire sample period but also over most sub-periods. If one aggregates over the transactions and open positions of the 1,092 technical models, it turns out that technical commodity futures trading exerts an excessive demand (supply) pressure on commodity markets.