Does speculation increase volatility in grain futures markets? Evidence from the Interwar Chicago Board of Trade

Abstract A key justification for futures regulation in the interwar period was the idea that speculators were making grain prices volatile, and therefore speculative activity needed to be restricted. This paper uses new data on grain futures contracts traded at the Chicago Board of Trade to empirically assess whether speculators Granger caused volatility in futures markets during the interwar period. We find that speculators did not Granger cause volatility, but volatile markets Granger caused speculative activity. These results suggest that speculators entered volatile markets but did not increase volatility.