| Abstract |
The current study is based on Master's hypothesis which suggests that investing in index funds was the main cause of a massive bubble in commodity futures prices over the period 2007–2008, and this bubble was transmitted to commodity spot prices through arbitrage linkages between futures and spot prices.An extensive amount of debate has been taking place to investigate the validity of the hypothesis. Such debate has significant economic implications in examining the real causes of price volatilities in global food markets because of their negative reflections both globally and locally. On the global aspect, excessive price volatilities can be an underlying cause of global food crises. On the local aspect, especially for developing countries dependent on food imports, any spikes in international prices will be reflected negatively on the local prices. Adequate understanding of the causes of food price volatilities should have an essential role in directing policymakers to adopt effective policies to counteract the effects of these volatilities.
The current study has investigated the Master's hypothesis by using different methodologies. The results of the current study found no evidence supporting the Master's hypothesis and hence, argue that futures price volatilities may be driven by factors other than investing in index funds. The most important of these factors may be the excessive demand for food commodities used for biofuel production.
In light of the pass-through determinants for the impact of international food prices on local prices and their variation from one country to another, the current study suggests that such determinants in Egypt have contributed to raise domestic prices higher than the equivalent price in the case of imports. Therefore, this was reflected adversely on the volatility of domestic prices leading to an increase in the trade deficit and the burden on public budget as well. Regarding the adoption of hedging mechanisms to face the risks of price volatilities in Egypt, it is clear that their effectiveness is still restricted. The recent tendency of using commodity derivatives as a hedging mechanism requires the effectiveness of other hedging mechanisms, especially the agricultural market information systems and early warning systems. Furthermore, it requires using effective strategies that can formulate rational expectations for future price behavior.
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