Effects Of Noncommercial Open Interest On Corn And Soybean Futures Price Volatility

Since the early 2000s a dramatic rise in institutional investment in agricultural futures markets has occurred. This rise may have caused an increase in price volatility, potentially resulting in added risk for farmers, agribusinesses, and consumers. Currently, regulators, hedgers, exchanges, and speculators lack information regarding how modern investments in agricultural futures markets affect short-term price volatility. The objective of this analysis is to examine the effect of institutional investment on short-term price volatility for corn and soybean futures markets. Using daily price data for corn and soybean futures from the Chicago Board of Trade (CBOT), several measures of price volatility – including differences, ratios, and measures of central tendency – are calculated and their results compared by Akaike’s Information Criteria (AIC) and Schwarz Bayesian Criteria (SBC). Using the Commodities Futures Trading Commission’s (CFTC) Commitments of Traders (COT) weekly Aggregated Futures and Options Combined report for corn and soybeans, a percent of open interest held by noncommercial traders is used to estimate movements in institutional investment. In order to account for the dependence of price on recent prices and the dependence of the variance of price on recent variances of price, a bivariate generalized autoregressive conditionally heteroskedastic (GARCH) model is used in this analysis. Portmanteau Q Tests and Engle’s LM tests are used to justify this approach. We find for each model the effect of institutional investment on price volatility is positive and, for most models, statistically significant.