Speculation and its impact on liquidity in commodity markets

In recent years, there has been extensive debate about the increasing speculative activity in commodity markets and passive index-investments, which are blamed for causing extreme long-term variations and price bubbles. This study sheds light on the question of what effect increasing speculative activity has on liquidity characteristics and aims to identify whether speculators are liquidity providers or consumers. This study finds weak evidence that speculative activity provides liquidity in the long term, while short-term speculative trading consumes liquidity. Further, the analysis shows that stock market liquidity and the liquidity of commodities have a strong positive correlation.