Working Paper: NBER ID: w18906
Authors: Michael Sockin; Wei Xiong
Abstract: This paper develops a model to analyze information aggregation in commodity markets. Through centralized trading, commodity prices aggregate dispersed information about the strength of the global economy among goods producers whose production has complementarity, and serve as price signals to guide producers' production decisions and commodity demand. Our analysis highlights important feedback effects of informational noise originating from supply shocks and futures market trading on commodity demand and spot prices, which are ignored by existing empirical studies and policy discussions.
Keywords: Informational Frictions; Commodity Markets; Futures Trading
JEL Codes: F3; G1; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| supply shocks (E39) | perceived economic strength (P17) |
| perceived economic strength (P17) | demand adjustments (F32) |
| supply shocks (E39) | commodity prices (Q02) |
| commodity prices (Q02) | production adjustments (E23) |
| supply shocks (E39) | demand reductions (H23) |
| futures market activity (G13) | spot prices (G13) |
| futures market activity (G13) | demand (R22) |