The effect of futures markets on the stability of commodity prices

Do futures markets have a stabilizing or destabilizing effect on commodity prices? The empirical evidence is inconclusive. We try to resolve this question by means of a learning-to-forecast experiment in which a futures market and a spot market are coupled. The strength of the coupling depends positively on the number of speculators on the futures market and negatively on storage costs and speculator risk aversion. We find that the spot price volatility changes non-monotonically with the strength of the coupling, resulting in a stabilizing effect on spot prices for weakly coupled markets and a destabilizing effect when the coupling with the futures market is strong.