Monday, June 23, 2008

Futures markets have no effect on spot prices

NYTimes columnist and Princeton economist Paul Krugman has previously (see my link here) argued that the trading of oil futures should have no effect on spot oil prices, contrary to what many politicians and pundits think. Here is his latest elaboration of that argument.


Nicolas said...

hmmm... If I buy a future, and the guy in front of me do not want to the bet it's going to fall, he is going to have to buy spot to be able to deliver.

so there is a connection.

Ernie Chan said...

I am not sure I understand your argument. Any bets on the future movement of prices can be settled with futures alone, without involving physical delivery. The number of future contracts outstanding is not a "conserved" quantity: 2 sides of a bet can cancel each other.