Drivers of agricultural commodity prices since 2000: Does investor sentiment influence wheat prices?

Master’s Thesis from the year 2013 in the subject Business economics - Investment and Finance, grade: 1,0, University of Edinburgh, language: English, abstract: Since the prices in the agricultural commodity market surged in 2008 and 2011 many articles investigated these turbulences from different perspectives. However, neither fundamental factors nor increased financial speculation provides a completely satisfactory explanation on this complex topic. Our study therefore tries to capture all these factors in a single approach and investigates the impact of investor sentiment on wheat futures returns. We construct an investor sentiment index out of monthly data from the period 2000 to 2013 by conducting a principal component analysis (PCA) with a set of well-established sentiment proxies. In particular, we employ three equity market proxies suggested by Baker & Wurgler (2007) and three wheat market specific sentiment proxies, in order to obtain a tailored investor sentiment index. The sentiment index is statistical significant at the 95 per cent significance level and predicts about 2.45 per cent of the total variation in the subsequent month wheat futures returns. The results are also robust after controlling for fundamental factors in an extended multiple linear regression analysis. Our sentiment index therefore proves that investor sentiment impacts wheat futures returns, although further research is needed to verify this relationship.