THE EFFECT OF FUTURES MARKETS AND CORNERS ON STORAGE AND SPOT PRICE VARIABILITY

When a futures market is introduced, the volume of storage should become more sensitive to changes in the return to storage. The increase in storage sensitivity means that storage will absorb a larger proportion of demand and supply shocks than it did previously, reducing spot price volatility. Data from the Chicago Board of Trade support the hypotheses of increased storage sensitivity and reduced spot price volatility. The effect of futures on spot price volatility is is sensitive to the competitive structure of the futures market. Futures market manipulation causes spot price variance to increase. Despite manipulation, the development of the wheat futures market caused the coefficient of variation of spot price to decline significantly