Who Sank the Boat?

London, 22 June 2012

EDHEC-Risk Institute Warns against "Speculative" Regulatory Proposals for Commodities Markets in Europe: In a new position paper, EDHEC-Risk Institute responds to a recent report* by Finance Watch on regulatory proposals for commodity derivatives markets in Europe. The paper describes an alternative narrative for what caused the recent commodity price rises and then notes what implications this narrative has for addressing Finance Watch's regulatory proposals.

In summary, the EDHEC-Risk position paper, entitled "Who Sank the Boat?" (in reference to the difficulty in apportioning causality for commodity price increases), 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 rises.

"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," says Noël Amenc, Professor of Finance, EDHEC Business School.

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.

"We recommend that European Union policymakers consider studying market practices globally and then adopt what is demonstrably best practice, rather than invent new untested regulations."

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Download the report below.