Response to the Finance Watch paper "Investing Not Betting"
This EDHEC-Risk position paper specifically responds to a recent report by Finance Watch on regulatory proposals for commodity derivatives markets in Europe.
Our paper describes an alternative narrative for what caused the recent commodity price spikes and then notes what implications this narrative has for addressing Finance Watch’s regulatory proposals.
In summary, this EDHEC-Risk position paper agrees with Finance Watch’s concerns regarding food and oil price spikes. Our main concern is that the public interest group’s specific proposals may actually be placebos (or worse) that distract from properly addressing the fundamental factors responsible for these price spikes.
We review both the theory and empirical evidence regarding how commodity futures markets work, including the role of the speculator. We also discuss how difficult it is to apportion causality for commodity price spikes when inventories-relative- to-consumption become sufficiently low.
We conclude by noting that modern commodity futures markets are the result of 160 years of trial-and-error efforts. 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.
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