| Summary: |
Convergence between commodity futures prices and the underlying physical assets at each contract’s expiration date is a pivotal condition for the market’s functioning. Between 2005 and 2010, convergence failed for several U.S. grain markets. This article presents a price pressure-augmented commodity storage model that links the scale of nonconvergence to financial investment channeled through indices, which are traded in commodity futures markets. The model is empirically tested, using Markov regime-switching regression analysis. Regression results strongly support the model’s predicted link between index investment and the extent of nonconvergence for three grains traded at the Chicago Board of Trade: wheat, corn, and soybeans.
JEL classifications: G13, G14, Q14, Q18 |
