In a robust critique of a recent paper by the public interest group Finance Watch (Investing Not Betting: Making Financial Markets Serve Society,” April 2012), EDHEC-Risk Institute has taken issue with a number of positions that this paper deems to be self-evident, e.g. that speculators must have a minority role in futures markets; that excessive speculation undermines the commodity price formation mechanism; and that there should be a linear relationship between a commodity’s supply-and-demand data and its price.
Drawing on the theoretical and empirical evidence in the academic literature, the EDHEC-Risk Institute position paper, entitled: “Who Sank the Boat?” (in reference to the difficulty in apportioning causality for commodity price spikes), shows that the above assertions are simply wrong.
According to the author of the EDHEC-Risk paper, Hilary Till: “Modern commodity futures markets are the result of 160 years of trial-and-error efforts. One result has been the creation of an effective price discovery process, which in turn assists in the coordination of individual efforts globally in dynamically matching current production decisions with future consumption needs in commodities.
“Before performing surgery on these institutions, we suggest that Finance Watch’s supporters tread carefully and not adopt “speculative” regulatory proposals whose ultimate effects are unknown. We further recommend that European Union policymakers instead consider studying market practices globally and then adopt what is demonstrably best practice, rather than invent new untested regulations.”
While agreeing that Finance Watch’s concern with food and oil price spikes is fully justified, EDHEC-Risk Institute is concerned that Finance Watch’s proposals in restricting speculation fall somewhere in the continuum of being a placebo to actually being harmful to the goals to which they aspire.