Rational destabilization in commodity markets.

Summary This article tackles the issue of rational destabilization in the commodity markets. The theoretical framework is a three-period model with futures positions revised within the intermediate holding period of the spot market. Technical traders enter the market in the intermediate period. The model outcome is a multiplicity of equilibria that are a source of instability. We show that the risk management of the rising weight of technical trading generates a higher variability in spot prices and damages long hedging. Furthermore, this article highlights caveats about the empirical measures of hedging pressure and excessive speculation that can be biased.