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Abstract
The Masters Hypothesis is the claim that unprecedented buying pressure in recent years from
commodity index investors created massive bubbles in food and energy prices. A number of
recent studies investigate the empirical relationship between index investment and price
movements in agricultural futures markets. One line of research uses time-series regression
tests, such as Granger causality tests, to investigate the relationship between price movements
and index positions. This research provides little evidence in support of the Masters Hypothesis
in agricultural futures markets. A second line of research uses cross-sectional regression tests
and studies in this area provide very limited evidence in favor of the Masters Hypothesis for
agricultural futures markets. A third line of research investigates whether there is a significant
relationship between commodity index trading and the difference, or spread, between futures
prices of different contract maturities. These studies report a range of results depending on the
type of test. However, the bulk of the evidence indicates either no relationship or a negative
relationship, which is once again inconsistent with the Masters Hypothesis. Overall, this
growing body of literature fails to find compelling evidence that buying pressure from
commodity index investment in recent years caused a massive bubble in agricultural futures
prices. The Masters Hypothesis is simply not a valid characterization of reality.