2013 Swissquote Conference on Commodities and Energy

Commodity trade is a key factor for the global economy, and commodity markets are significant for Switzerland's economic development in particular. Risks inherent in the production, storage and sale of commodities led to the creation of commodities futures markets already in ancient times. These markets have recently attracted institutional investors, and huge investments have been flowing into commodities and energy. At the same time we have seen unprecedented booms and busts of some commodities prices. Not surprisingly therefore, the financialization of commodities – that is, the presence of institutional investors – has become subject to heated political debates. Did speculation cause price spikes of oil, food, and electricity?

A popular view is that the increased financialization of commodities futures markets allowed speculation to become a major determinant of commodities prices. But how large is the speculative component in commodities prices? And how to optimally hedge against price changes, and extract optimal value from commodity investments?This year’s Swissquote conference aimed at clarifying these questions. Six of the leading financial economists and engineers in the field have provided insights on the statistical nature of electricity price movements (Prof. Fred Espen Benth, University of Oslo), the effects of financialization on the commodities futures market (Prof. Anna Pavlova, London Business School), the determinants for comovement between spot and futures prices of Oil (Prof. Lutz Kilian, University of Michigan), the interplay between producers’ hedging demand and speculators’ capital constraints on futures prices (Prof. Lars A. Lochstoer, Columbia University), and the effect of commodities prices on the production industry (Prof. Jaime Casassus, Universidad Catolica de Chile). This year’s industry talk was on quantitative approaches in deriving optimal value from some specific real assets such as gas (Dr. Mahmoud Hamada, Ernst&Young, Geneva).

A key finding throughout the presentations was that the recent price surges in commodities could only partly be explained by the presence of institutional investors, but were mainly driven by other economic fundamentals and increased demand. This sheds critical light on some recent directions taken by politics for regulating commodities markets.

The conference was jointly sponsored by the Swiss Finance Institute, the National Centre of Competence in Research (NCCR) in the field of "Financial Valuation and Risk Management" (FINRISK), and the Swissquote Chair in Quantitative Finance at EPFL.