New empirical evidence in support of the theory of price volatility of storable commodities under rational expectations in spot and futures markets

Abstract The impact of futures markets on the spot price volatility of storable commodities can be either stabilizing or destabilizing. The underlying theoretical model determines that the impact depends on whether the dominant/prevailing disturbance in the commodity market comes from consumption, production, or inventory holding. We use Directed Acyclic Graphs analysis to determine causality and endogeneity/exogeneity of our variables, resulting in spot and futures prices being endogenous and storage being an exogenous variable. Additionally, impulse response and variance decomposition specifications suggest destabilizing impacts of futures markets on corn spot prices and stabilizing impacts on oil spot prices.