Examining the “Masters Hypothesis” About the Role of Index Funds in the 2007-2008 Price Spike

Michael Giberson

From the most recent (January 2012) edition of Energy Economics: “Testing the Masters Hypothesis in commodity futures markets” by Scott Irwin and Dwight Sander.

The “Masters Hypothesis” refers to claims by investment manager Michael Masters (in testimony before a Senate committee -included in this collection– and on the TV program 60 minutes, among other places) that significant flows of cash into commodity index funds drove the commodity price spike of 2007-08. Masters made a big splash with his claims, at least among the easily impressed (i.e. the TV program 60 minutes).

In brief, Irwin and Sander test the idea against market data and find no support for Masters’ claims. See a related discussion at the Big Picture Agriculture blog.

Here is the article abstract:

The ‘Masters Hypothesis’ is the claim that long-only index investment was a major driver of the 2007–2008 spike in commodity futures prices and energy futures prices in particular. Index position data compiled by the CFTC are carefully compared. In the energy markets, index position estimates based on agricultural markets are shown to contain considerable error relative to the CFTC’s Index Investment Data (IID). Fama–MacBeth tests using the CFTC’s quarterly IID find very little evidence that index positions influence returns or volatility in 19 commodity futures markets. Granger causality and long-horizon regression tests also show no causal links between daily returns or volatility in the crude oil and natural gas futures markets and the positions for two large energy exchange-traded index funds. Overall, the empirical results of this study offer no support for the Masters Hypothesis.