In the 1920s and 1930s, empirical studies of cotton futures pricing tend to attribute market fluctuations to shifts in fundamentals. In this paper, we qualify this view focusing on the role of speculation. Our research is based on a nonlinear heterogeneous agents model which posits the existence of two categories of speculators, feedback traders and fundamentalists, who react (differently) to deviations of market prices from their fundamental value. The analysis is based on original data drawn from the online archives of The Times and on an historical description of the working of a staple commodity market. The empirical findings allow us to conclude that whereas feedback traders tend to herd, fundamentalists are more affected by risk aversion and react but slowly to the underpricing/overpricing of the cotton contracts. As expected, the presence of fundamentalists stabilizes the market even if, at least in the time period under investigation, the behavior of feedback traders is the major driver of short-run price dynamics.

Cifarelli, G., Paesani, P. (2016). Speculative pricing in the Liverpool cotton futures market: a nonlinear tale of noise traders and fundamentalists from the 1920s. CLIOMETRICA [10.1007/s11698-014-0121-y].

Speculative pricing in the Liverpool cotton futures market: a nonlinear tale of noise traders and fundamentalists from the 1920s

PAESANI, PAOLO
2016-01-01

Abstract

In the 1920s and 1930s, empirical studies of cotton futures pricing tend to attribute market fluctuations to shifts in fundamentals. In this paper, we qualify this view focusing on the role of speculation. Our research is based on a nonlinear heterogeneous agents model which posits the existence of two categories of speculators, feedback traders and fundamentalists, who react (differently) to deviations of market prices from their fundamental value. The analysis is based on original data drawn from the online archives of The Times and on an historical description of the working of a staple commodity market. The empirical findings allow us to conclude that whereas feedback traders tend to herd, fundamentalists are more affected by risk aversion and react but slowly to the underpricing/overpricing of the cotton contracts. As expected, the presence of fundamentalists stabilizes the market even if, at least in the time period under investigation, the behavior of feedback traders is the major driver of short-run price dynamics.
Pubblicato
Rilevanza internazionale
Articolo
Esperti anonimi
Settore SECS-P/01 - Economia Politica
English
Behavioural Finance, Speculation, Historical cotton futures market
http://link.springer.com/article/10.1007/s11698-014-0121-y
Cifarelli, G., Paesani, P. (2016). Speculative pricing in the Liverpool cotton futures market: a nonlinear tale of noise traders and fundamentalists from the 1920s. CLIOMETRICA [10.1007/s11698-014-0121-y].
Cifarelli, G; Paesani, P
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2108/127994
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