I got into an extended discussion of the use of data in the social sciences over at Felix Salmon’s blog. The underlying issue was the recent Senate report attributing price dislocations in the wheat market to long only index investors (aka excessive speculation).
dWj chimed in with a good summary:
The existence of the delivery oligopoly [in the wheat market] is necessary and nearly sufficient. That should be considered the primary cause of the failure here, even if it needed a trigger before the spreads got particularly wide in the last couple years. Making the futures cash-settled requires a way to determine the authoritative final settlement price; if it’s not too messy (in terms of performance risk) to dramatically expand the number of permitted deliverers, that would seem to me to be the sensible solution.
I think, however, that there are two important issues brought up by the Wheat Report: first, what caused the huge divergence between cash and futures prices at expiration in 2008 and, second, is it possible for speculators to affect the spot price of a commodity. dWj’s comment addresses the first issue — which may well require the existence of a delivery oligopoly. On the other hand, I don’t see any reason that a delivery oligopoly is necessary for speculators to affect spot prices.
(I’m posting this comment here, because from an aesthetic point of view I think dWj’s comment is a fine conclusion to that thread.)
Synthetic Assets 