Price Discovery in Agricultural Commodity Markets: Do Speculators Contribute?

Previous literature on price discovery in commodity markets is mainly focused on the
question of whether the spot or the futures market dominates the price discovery
process. Little attention, however, has been paid to the question of how the price
discovery process is affected by futures speculation. Using different measures for
speculation and hedging and a new price discovery metric, the present study analyzes
this relationship for various agricultural commodities. On the whole, the results suggest
that speculative activity reduces the level of noise in the futures markets under analysis,
while increasing their relative contribution to the price discovery process.