Position Limits Regulation - White Paper - Irwin/Garcia/Good/Kunda (University of Illinois at Urbana-Champaign): Spreads and Non-Convergence in CBOT Corn, Soybean, and Wheat Futures:Are Index Funds to Blame?

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November 2009

From the white paper:

"The purpose of this paper is to evaluate the role of index funds in the recent convergence problems of CBOT corn, soybean, and wheat futures contracts. The first part of the analysis demonstrates how large spreads in futures markets contribute to lack of convergence by uncoupling cash and futures markets. The second part of the analysis tests whether index fund trading expanded spreads in CBOT corn, soybean, and wheat futures. Statistical test results provide no evidence that rolling of positions by index funds or the initiation of large index positions in a “crowded market space” contribute to an expansion of the spreads. Since the statistical evidence does not support allegations that index funds are ultimately responsible for non-convergence problems in the three CBOT futures markets, other factors are examined that may have contributed to the rising spreads. A combination of CBOT contract storage rates that lagged market rates and a change in underlying supply and demand conditions that was common to all three grain futures markets appears to be the most promising avenue for explaining the large carry and attendant non-convergence."


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