Price bubbles in agricultural commodity markets and contributing factors: evidence for corn and soybeans in China

Abstract

Purpose

The purpose of this paper is to detect the existence of price bubbles and examine the possible contributing factors that associate with price bubble occurrences in China agricultural commodity markets.

Design/methodology/approach

Using recently developed rolling window right-side augmented Dickey–Fuller test, we first detect the dates of price bubbles in China's two important agricultural commodity markets, namely corn and soybeans. Then, we use a penalized maximum likelihood estimation of a multinomial logistic model to estimate the contributing factors of price bubbles in both markets, respectively.

Findings

Results from the bubble detection indicate that price bubbles account for 5.48% (3.91%) of the studied periods for corn (soybeans). More importantly, we find that market liquidity and speculation have opposite effects on the occurrences of bubbles in the corn and soybeans market. World stocks-to-use and exchange rates affect the occurrences of bubbles in a different way for each commodity, as well. Price bubbles are more likely associated with strong economic activity, high interest rates and low inflation levels.

Originality/value

This is the first study considering commodity-specific features into the formation of price bubbles. Through accurately identifying the bubble dates and fixing the estimation bias of rare events models, this study enables us to obtain robust results for each commodity. The results imply that China's corn and soybeans market respond differently to the speculative activity and external shocks from international markets. Therefore, future policy regulations on commodity markets should focus on more commodity-specific factors when aiming at avoiding bubble occurrences.

Citation

Mao, Q., Ren, Y. and Loy, J.-P. (2021), "Price bubbles in agricultural commodity markets and contributing factors: evidence for corn and soybeans in China", China Agricultural Economic Review, Vol. 13 No. 1, pp. 22-53. https://doi.org/10.1108/CAER-10-2019-0190