From molecule to market: steroid hormones and financial risk-taking

Little is known about the role of the endocrine system in financial decision-making. Here, we survey research on steroid hormones and their cognitive effects, and examine potential links to trader performance in the financial markets. Preliminary findings suggest that cortisol codes for risk and testosterone for reward. A key finding of this endocrine research is the different cognitive effects of acute versus chronic exposure to hormones: acutely elevated steroids may optimize performance on a range of tasks; but chronically elevated steroids may promote irrational risk-reward choices. We present a hypothesis suggesting that the irrational exuberance and pessimism observed during market bubbles and crashes may be mediated by steroid hormones. If hormones can exaggerate market moves, then perhaps the age and sex composition among traders and asset managers may affect the level of instability witnessed in the financial markets.     

A Note on Trader Sharpe Ratios

Traders in the financial world are assessed by the amount of money they make and, increasingly, by the amount of money they make per unit of risk taken, a measure known as the Sharpe Ratio. Little is known about the average Sharpe Ratio among traders, but the Efficient Market Hypothesis suggests that traders, like asset managers, should not outperform the broad market. Here we report the findings of a study conducted in the City of London which shows that a population of experienced traders attain Sharpe Ratios significantly higher than the broad market. To explain this anomaly we examine a surrogate marker of prenatal androgen exposure, the second-to-fourth finger length ratio (2D∶4D), which has previously been identified as predicting a trader''s long term profitability. We find that it predicts the amount of risk taken by traders but not their Sharpe Ratios. We do, however, find that the traders'' Sharpe Ratios increase markedly with the number of years they have traded, a result suggesting that learning plays a role in increasing the returns of traders. Our findings present anomalous data for the Efficient Markets Hypothesis.     

Understanding Financial Market States Using an Artificial Double Auction Market

The ultimate value of theories describing the fundamental mechanisms behind asset prices in financial systems is reflected in the capacity of such theories to understand these systems. Although the models that explain the various states of financial markets offer substantial evidence from the fields of finance, mathematics, and even physics, previous theories that attempt to address the complexities of financial markets in full have been inadequate. We propose an artificial double auction market as an agent-based model to study the origin of complex states in financial markets by characterizing important parameters with an investment strategy that can cover the dynamics of the financial market. The investment strategies of chartist traders in response to new market information should reduce market stability based on the price fluctuations of risky assets. However, fundamentalist traders strategically submit orders based on fundamental value and, thereby stabilize the market. We construct a continuous double auction market and find that the market is controlled by the proportion of chartists, P_c. We show that mimicking the real state of financial markets, which emerges in real financial systems, is given within the range P_c = 0.40 to P_c = 0.85; however, we show that mimicking the efficient market hypothesis state can be generated with values less than P_c = 0.40. In particular, we observe that mimicking a market collapse state is created with values greater than P_c = 0.85, at which point a liquidity shortage occurs, and the phase transition behavior is described at P_c = 0.85.     

Investment strategies used as spectroscopy of financial markets reveal new stylized facts

We propose a new set of stylized facts quantifying the structure of financial markets. The key idea is to study the combined structure of both investment strategies and prices in order to open a qualitatively new level of understanding of financial and economic markets. We study the detailed order flow on the Shenzhen Stock Exchange of China for the whole year of 2003. This enormous dataset allows us to compare (i) a closed national market (A-shares) with an international market (B-shares), (ii) individuals and institutions, and (iii) real traders to random strategies with respect to timing that share otherwise all other characteristics. We find in general that more trading results in smaller net return due to trading frictions, with the exception that the net return is independent of the trading frequency for A-share individual traders. We unveiled quantitative power laws with non-trivial exponents, that quantify the deterioration of performance with frequency and with holding period of the strategies used by traders. Random strategies are found to perform much better than real ones, both for winners and losers. Surprising large arbitrage opportunities exist, especially when using zero-intelligence strategies. This is a diagnostic of possible inefficiencies of these financial markets.     

Knowledge and Perceptions of Highly Pathogenic Avian Influenza (HPAI) among Poultry Traders in Live Bird Markets in Bali and Lombok,Indonesia

Highly Pathogenic Avian Influenza (HPAI) has been prevalent in Indonesia since 2003 causing major losses to poultry production and human deaths. Live bird markets are considered high risk areas due to the density of large numbers of mixed poultry species of unknown disease status. Understanding trader knowledge and perceptions of HPAI and biosecurity is critical to reducing transmission risk and controlling the disease. An interview-administered survey was conducted at 17 live bird markets on the islands of Bali and Lombok in 2008 and 2009. A total of 413 live poultry traders were interviewed. Respondents were mostly male (89%) with a mean age of 45 years (range: 19–81). The main source of AI information was TV (78%), although personal communication was also identified to be an important source, particularly among female traders (60%) and respondents from Bali (43%). More than half (58%) of live poultry traders interviewed knew that infected birds can transmit HPAI viruses but were generally unaware that viruses can be introduced to markets by fomites. Cleaning cages and disposing of sick and dead birds were recognized as the most important steps to prevent the spread of disease by respondents. Two thirds (n = 277) of respondents were unwilling to report sudden or suspicious bird deaths to authorities. Bali vendors perceive biosecurity to be of higher importance than Lombok vendors and are more willing to improve biosecurity within markets than traders in Lombok. Collectors and traders selling large numbers (>214) of poultry, or selling both chickens and ducks, have better knowledge of HPAI transmission and prevention than vendors or traders selling smaller quantities or only one species of poultry. Education was strongly associated with better knowledge but did not influence positive reporting behavior. Our study reveals that most live poultry traders have limited knowledge of HPAI transmission and prevention and are generally reluctant to report bird deaths. Greater efforts are needed to engage local government, market managers and traders in education and awareness programs, regulatory measures and incentive mechanisms. Understanding and evaluating the social responses to such an integrated approach could lead to more effective HPAI prevention and control.     

Disciplining Investment Bankers, Disciplining the Economy: Wall Street's Institutional Culture of Crisis and the Downsizing of "Corporate America"

ABSTRACT   Countering the "mystique" of finance as abstract and disembedding, in this article I approach the financial market from the site of investment banking corporate culture to concretize large-scale processes and access its effects in the world. By investigating Wall Street investment banks' role in two pivotal socioeconomic phenomena—rampant downsizings throughout "corporate America" and the financial bubble and bust of 2001—I explore whether financial crises and corporate downsizing can be better understood via Wall Street's quotidian practices. I draw theoretical inspiration from the figure of the downsized investment banker, who embodies and connects Wall Street's rationales for downsizing as well as "the effects." Although shareholder value and externalized market justifications are Wall Street's models for understanding downsizing, I move beyond these dominant assumptions, demonstrating that bankers' own work experiences, market temporalities, and organizational culture serve as an incisive model to explain Wall Street's role in downsizing and financial crisis. [Keywords: Wall Street, corporate downsizing, financial markets, shareholder value, organizational culture]     

Financial Symmetry and Moods in the Market

This paper studies how certain speculative transitions in financial markets can be ascribed to a symmetry break that happens in the collective decision making. Investors are assumed to be bounded rational, using a limited set of information including past price history and expectation on future dividends. Investment strategies are dynamically changed based on realized returns within a game theoretical scheme with Nash equilibria. In such a setting, markets behave as complex systems whose payoff reflect an intrinsic financial symmetry that guarantees equilibrium in price dynamics (fundamentalist state) until the symmetry is broken leading to bubble or anti-bubble scenarios (speculative state). We model such two-phase transition in a micro-to-macro scheme through a Ginzburg-Landau-based power expansion leading to a market temperature parameter which modulates the state transitions in the market. Via simulations we prove that transitions in the market price dynamics can be phenomenologically explained by the number of traders, the number of strategies and amount of information used by agents, all included in our market temperature parameter.     

Wild Edible Plant Markets in Kisangani, Democratic Republic of Congo

Benefits from wild edible plants (WEP) are multiple for rural households as well as urban traders. To set species priorities for WEP market development and domestication, we performed an inventory of WEP species and traders in five markets and one road-side selling point in Kisangani. During four one-month sessions between September 2007 and July 2008, all WEP traders present in the target markets were interviewed. We registered 119 unique sellers, selling 15 different WEPs. The September-October period and ‘Marché Central’ were the most important for WEP trade in Kisangani. Added values and net incomes generated through WEP sales were very divergent. Four types of traders could be distinguished. Gnetum africanum trade involves the more dynamic traders. Cola acuminata, Garcinia kola and Piper guineense spices have local and international market potential. Within the wild fruits category we propose Landolphia owariensis and Tetracarpidium conophorum as priority species for local market development.     

The speculator's bread: what is behind rising food prices?

Speculators increasingly invest into food markets for financial gain, with potentially devastating consequences for millions of poor people who cannot afford food at inflated prices....the market price of agricultural commodities is more important than those of nearly all other productsMost citizens in developed countries buy and consume their food without any consideration of how it is produced or how it gets from the field or slaughterhouse to the supermarket. They take for granted that they can afford it and do not care about its production and the economic, financial and other factors that eventually determine its price on the supermarket shelf. However, the market price of agricultural commodities is more important than those of nearly all other products. Increasing prices can cause hunger for millions of people and enormous political repercussions. In 2007–2008, a price explosion for grain and other commodities caused malnutrition among an estimated 115 million people and triggered hunger revolts in several nations. The prices subsequently dropped, only to soar again three years later (Fig 1), surpassing previous highs by the end of 2010. The revolt in Tunisia in January 2011 that eventually led to the government''s downfall was originally triggered by rising food prices.Open in a separate windowFigure 1FAO Food Price Index values from 1990 to 2010“The FAO Food Price Index is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices (representing 55 quotations), weighted with the average export shares of each of the groups for 2002–2004” (http://www.fao.org). FAO, Food and Agricultural Organization.Which factors or mechanisms determine the market price of food? If a drought or a flood were to destroy harvests in wheat-exporting countries such as Australia or Russia, it would certainly drive up the price of wheat. Yet, there is also ongoing debate about whether and how the 2007–2008 price spike might have been driven by financial speculation in commodity markets. This is not only a media debate, but also of scientific interest as it gets to the heart of economic theory; indeed, various research articles have tried to analyse and explain the causes of the 2007–2008 price spike.The revolt in Tunisia in January 2011 that eventually led to the government''s downfall was originally triggered by rising food pricesThe global market-prices for agricultural commodities are determined in different ways, depending on the commodity. Some products, such as rice, are mainly traded nationally, with only a small share being traded internationally; other commodities are traded in large quantities on international commodity exchanges, particularly in the USA. As the USA is one of the main producers and exporters of wheat, corn and soybean—and has a liberal market tradition—these exchanges are important for both the US and the global agricultural industry. In Europe, commodity exchanges for agricultural products play a lesser role, partly owing to the former Common Agricultural Policy of the European Union (EU), which tightly regulated the production of foodstuffs. However, this policy is now changing and exchanges are set to have a more important role in Europe too. The Paris commodity exchange is already a relevant marketplace for wheat, and the London commodity exchange has an important role in the global trade of coffee, cocoa and sugar.The price of any commodity should reflect the levels of supply and demand. Of course, fluctuations occur and are sometimes justified by fundamental factors, for example a bad harvest or increased demand. However, other external factors—such as a lack of information, asymmetries, externalities, conflicts of interest and agency problems—can also influence prices on commodity markets. In addition, outright speculation (for instance by hoarding), price bubbles and even market manipulation can repeatedly influence prices. The largest grain companies in the world, such as ADM, Cargill, Dreyfus and Bunge, have an interest in maximizing their profits and do so by buying and selling commodities at the most suitable time. Even farmers speculate on commodity markets, for example by withholding their harvest when they expect a price rise. To keep these factors and interests under control it is necessary and indeed legitimate to regulate and control markets, not just for food commodities.Commodities are not only traded physically on ‘spot'' or cash markets, but also subject to forward buying through ‘futures''. A future is a contract between a producer—that is, a farmer—and a buyer that specifies the amount, the price and the delivery date of a purchase. Similarly, buyers—such as millers—can use futures to buy a certain amount of grain at a guaranteed price ahead of time. Many farmers and end-users take advantage of futures to pre-sell or pre-purchase agricultural goods to insure themselves against market fluctuations. This ‘hedging'' reduces their risks and enables them to invest more safely.Intermediary traders ensure that the two sides meet. Traditionally, these traders are established firms that buy and sell futures from producers and to consumers, thereby providing the necessary liquidity. They shoulder the risks and gain their profits from the difference between the price stipulated in a future and the final market-price. These firms, naturally, have a profound knowledge and understanding of the commodity markets in which they are trading.In addition, such trading can take place both on exchanges (then called ‘futures trading'') and bilaterally ‘over-the-counter'' (OTC). Modern trading in commodity futures began in the USA during the mid-nineteenth century. Chicago, where the first modern wheat futures were traded, is still the largest and most important marketplace for agricultural commodities in the world, even though Asian countries have contested this in recent years.As futures no longer require the seller to possess the actual goods and because physical delivery is replaced by cash exchanges, their volume can be separated from the actual quantity of the commodity; their volume can also increase indefinitely as long as enough intermediaries want to deal with them. In the past, though, relatively few investors and intermediaries speculated on future markets. Moreover, regulatory agencies can and have imposed rules to limit the extent of speculation, for instance by regulating delivery dates, delivery locations, the timeframe for buying, certified stocks, storage fees, position limits, price limits and other factors.However, an increasing number of investors from outside the traditional markets—including banks, and pension and investment funds—have begun to speculate on agricultural futures exchanges. These large investors not only push the exploitation of price trends, but also—in contrast to the traditional intermediaries—are often not familiar with the cash market and the fundamentals. These outside speculators also often invest for reasons that have nothing to do with the cash market, for instance to protect themselves against price fluctuations on financial markets....an increasing number of investors from outside the traditional markets—including banks, and pension and investment funds—have begun to speculate on agricultural futures exchangesThis is the main reason that the US government imposed strict limits for financial speculation on commodity future exchanges. Only commercial participants with an interest in hedging were exempted. However, these rules and limits have been slowly eroded or removed. In 1991, one financial investor managed to get an official exemption from the limits in order to hedge his financial risk. In the following years, more traders were granted such exemptions or limit expansions. In 2000, the Commodity Futures Modernization Act exempted OTC trading from regulatory oversight and control. As a result of laxer oversight, other speculators joined the market, especially after the beginning of the financial crisis in 2006. These newcomers include banks such as Goldman Sachs, JP Morgan and Deutsche Bank; pension funds, such as the California State Teachers'' Retirement System; and hedge funds. A good deal of their trading is carried out through ‘swaps'', a type of OTC instrument.As these new and powerful speculators have entered the market, the total volume of new speculative investments in commodity indexes has increased more than tenfold in five years...As these new and powerful speculators have entered the market, the total volume of new speculative investments in commodity indexes has increased more than tenfold in five years: from an estimated $15 billion in 2003 to around $200 billion in 2008. ‘Index funds'', which aim to imitate the cash markets with futures, rose particularly high: between 2006 and 2008, index traders increased the demand for wheat futures from 33% to 100%. The number of daily outstanding contracts held by index traders on the Chicago Mercantile Exchange grew from approximately 30,000 in early 2004 to 220,000 in mid-2008 (US Senate PSI, 2009).The unexpected price hike in 2007–2008 has triggered a lively debate among economists about whether this increased speculation in futures has driven up cash prices. This discussion is both a theoretical debate about how futures markets work and an empirical debate about the reasons behind the price rise. The main questions are: Can speculation alone move the prices of futures and can there be excessive, that is, harmful, speculation in futures? Can futures prices influence the cash markets, and if so, how?Some claim that that the amount of trading in futures is irrelevant to the real price, because it is always a “zero-sum game” between traders (Irwin & Sanders, 2010). For every position that bets on a rising price (long position), there is a counterparty which bets on a falling price (short position). By this view, the amount of trading is detached from the price level. Indeed, it is not possible to demonstrate an unequivocal relationship between the amount of trading and the price.Yet, a large in-flow or out-flow of money can create a price shift. Statistical research has demonstrated the growing interdependence of commodity markets, both between the markets themselves and with financial markets. Tang & Xiong (2010) found that “concurrent with the rapidly growing index investment in commodities markets since the early 2000s, futures prices of different commodities in the US became increasingly correlated with each other. [...] In contrast, such commodity price co-movements were absent in China, which refutes growing commodity demands from emerging economies as the driver.”Silvennoinen & Thorp (2010) observe, “higher and more variable correlations between commodity futures and stock returns.” This trend—often called financialization—has also been observed by the United Nations Conference on Trade and Development (UNCTAD, 2009; Mayer, 2009). Similarly, an investigation by the US Senate took the view that the price of US futures had been influenced by excessive speculation (US Senate PSI, 2009).The second question, which is more relevant to consumers, remains: how can futures prices influence the cash price? Theoretically, the cash price should always converge with the futures price once the future is delivered. Some economists therefore assume that if futures are over-priced, the cash market will simply solve this problem by speculative arbitrage trading: buying something at a lower price and immediately reselling it for a higher price. Futures markets, in this view, are always driven by the cash markets, which themselves are determined by the fundamental mechanisms of supply and demand (Irwin & Sanders, 2010). However, it is logical to assume that futures markets have an influence on cash markets because, as all economists agree, they should predict the future price on the cash markets.Thus: how does speculation in futures influence prices on cash markets and how long does the effect last? Some scientists at the UN Food and Agricultural Organization were able to identify only short-term effects (Dreschler et al, 2010), but what does short-term mean? Different economists use different definitions: some define short-term as one day, others one week and some others one month. However, if the same effect leads to a one-month deviation, why should it not cause a deviation of many months? And what is the effect of a month-long deviation for people who need to buy food every day? As the famous economist John Maynard Keynes noted, in the long run we are all dead. Indeed, financial speculators cannot suspend the laws of supply and demand in the long-term, but they are able to cause short- to medium-term price increases, which, for the world at large, is bad enough.Traders are usually open about the effects of their trading. In April 2006, a hedge fund manager commented: “There is so much money going into commodity markets that it almost doesn''t matter how fundamentals behave” (WDM, 2010). At the same time, the investment bank Merill Lynch estimated that commodity prices had increased by 50% through speculation (Thornton, 2006). One of the most well-known speculators, George Soros, commented that, “Every speculation is also rooted in reality [however] speculators create the bubble that lies above everything. Their expectations, their gambling on futures help drive up prices, and their business distorts prices, which is especially true for commodities. It is like hoarding food in the midst of a famine, only to make profits on rising prices. That should not be possible” (WDM, 2010).Furthermore, if the futures price is higher than the cash price, traders on the cash market are inclined to store food in order to gain higher incomes. This is a common occurrence in hard commodity markets, such as oil or metal. However, hoarding of agricultural commodities driven by expectations of higher prices can also take place. Finally, divergent cash and futures prices, along with market volatility, cause other problems; higher costs are required for risk management and hedging, which harms the food business and ultimately affects food supply and prices (US Senate PSI, 2009).Many observers initially argued that the price spike of 2007–2008 was related to bad harvests, rising demand from importing countries—notably China—and the growing production of biofuels. A leading study by the World Bank was perhaps most influential at the time (World Bank, 2008). However, even when it became clear in early 2008 that harvests had recovered, the prices still rose. Moreover, prices on the cash and futures markets plummeted from mid-2008 onwards although demand from emerging countries remained high, even during the financial crisis. Some researchers are still not convinced that the 2007–2008 price spike was caused by speculation and continue to point to the increasing demand for biofuels, depreciation of the US dollar and the rising price of oil to explain this phenomenon (Headey & Fan, 2010).Nonetheless, criticism of financial speculations on commodity markets has been growing. In 2009, US hedge fund manager Michael W. Masters testified to the US Senate that passive investment, such as index funds, “provides no benefits to the markets while it exacts a heavy toll” (Masters, 2009). Accordingly, the US Senate and various scholars found signs of excessive and harmful speculation in US wheat markets (US Senate PSI, 2009; Lines, 2010; Gilbert, 2010). Headey & Fan (2010) reject the argument that rising demand from emerging countries could have caused the spike, writing that “low interest rates, and investment portfolio adjustments in favour of commodities” have an important role in price formation. The World Bank, in a recent working paper (Baffes & Haniotis, 2010), has also recognized the influence of financial speculators on prices: “We conjecture that index fund activity [...] played a key role during the 2008 price spike. Biofuels played some role too, but much less than initially thought. And we find no evidence that alleged stronger demand by emerging economies had any effect on world prices.” In a more recent paper by the UN Special Rapporteur on the Right to Food, Olivier de Schutter (2010) found that “a significant portion of the price increases and volatility of essential food commodities can only be explained by the emergence of a speculative bubble.”Another reason to assume that speculation is a harmful influence is that the oil-price peak of 2008 also seems to have been caused by speculation (Masters, 2009; Chevalier et al, 2010). This is not an independent explanatory variable for the price rise in agricultural commodities, but it highlights the impact of speculation.In addition to index funds, hedge funds have become increasingly important players in commodity markets. These funds, which can invest more freely than any other type of fund, often take highly speculative long and short positions to profit from rising or falling prices. Hedge funds can also move huge amounts of money. In July 2010, a single hedge fund bought almost all cocoa futures on the London commodity exchange, in an attempt to force cocoa buyers to buy from it at a monopolistic price. Afterwards, a group of cocoa processing companies called on the London International Financial Futures and Options Exchange to prevent such speculations and threatened to go to the New York commodity exchange, where tighter regulations are in force.Today, there is again a debate about whether speculation has a role in rising prices. On the one hand, harvest losses for wheat crops in July 2010 would justify a slight price rise. On the other hand, National Farmers Union representative Doug Sombke said at a US Commodity Futures Trading Commission hearing in the USA, “I think speculators have created a huge mess here for us. Farmers are feeling this today” (Reuters, 2010). Klaus Josef Lutz, CEO of BayWa, one of Europe''s biggest grain traders, commented that, “70 percent of the price rise can be blamed on speculators” (Handelsblatt, 2010). Finally, wheat is not nearly as scarce as the price rise would suggest: the global 2010 harvest is estimated to be the third largest of all time (FAO, 2010a).Higher food prices not only cause immediate problems; by reducing the available money for health care and education, they also produce negative long-term effectsTwo-thirds of developing countries are net importers of basic food commodities, even if the percentage of farmers in these countries is much higher than in industrialized countries. Furthermore, the relative household expenditure on food is much higher in developing countries: 60–80% compared with approximately 15% in the EU. This makes developing countries particularly vulnerable to price rises. They were hit hard in 2007–2008 and are again facing serious problems; the recent revolt in Tunisia being the most visible uprising sparked by food prices. Higher food prices not only cause immediate problems; by reducing the money available for health care and education, they also produce negative long-term effects.Some developing countries are commodity producers. As such, they profit, more or less, from price increases. However, their small-scale farmers are the weakest link in the production chain and profit the least from price rises. Apart from speculators, it is larger intermediaries, retailers or bigger farms that reap most of the profits (Höffler & Owour Ochieng, 2009).Growing ‘financialization'' makes it vital to reform commodity futures markets and set clear limits for speculation. Trading by financial speculators must take place on regulated and transparent commodity exchanges. The number and influence of speculators must be controlled through market and position limits. As Ann Berg, former commodity trader, stressed at a recent FAO special committee, “Over 150 years of futures trading history demonstrates that position limits are necessary in commodities of finite supply to curb excessive speculation and hoarding” (FAO, 2010b). Furthermore, some types of investment, such as index funds, could be strongly restricted. Generally, a legal demarcation between the commodities futures markets and the financial markets and a special agency to oversee it is required, such as the US Commodity Futures Trading Commission.The USA has learned its lesson from the past few years and is once again restricting financial speculation through reforms introduced in July 2010The USA has learned its lesson from the past few years and is once again restricting financial speculation through reforms introduced in July 2010. The US government aims to return OTC trading—mostly carried out as swaps—to multilateral trading and clearing platforms. Higher transparency requirements will apply and financial speculators will once again be limited by stricter position limits, without exemptions.As mentioned above, fewer agricultural commodities are traded on a large scale in the EU, but the London and Paris commodity exchanges still exert an influence. Moreover, stricter regulations in the USA could induce speculators to move their activities to European exchanges, even though there are strong position limits, at least at the Paris commodity exchange. Reforms of the financial markets in the EU are therefore necessary, and these are currently being debated. Michel Barnier, the European Commissioner for Internal Market and Services, has rightfully called speculation with food commodities a scandal. Whether his words will be followed with actions remains to be seen.In September 2010, the European Commission released draft regulations for OTC derivatives that include plans to create new trading platforms called ‘central counterparties''. The draft regulations require that OTC trades are limited and fulfil transparency requirements (EC, 2010). Along with these, two other directives will be revised: one on markets in financial instruments, such as futures, and one on market abuse. However, the EU has not yet acknowledged that commodities markets are not the same as financial markets. It is therefore not certain whether they will propose and pass appropriate regulation, which ought to include a special regulatory body, full transparency and position limits....farmers and buyers have a strong interest in managing their risks, and futures markets have proven to be an appropriate, if imperfect, mechanism...Given the problems that commodity futures markets have caused, it might be tempting to renounce them. Conversely, farmers and buyers have a strong interest in managing their risks, and futures markets have proven to be an appropriate, if imperfect, mechanism by which to do so. Other measures such as harvest assurances bring their own disadvantages. Moreover, local markets can also cause problems, as can political measures, especially when these include export bans.Nonetheless, it is prudent to explore alternatives. These could include regional or bilateral treaties between states, which have been successfully practised in several cases in Asia. The build-up of higher, more reliable reserves at the national, regional or global level is another option for dealing with volatility and uncertainty. Such reserves could also be virtual, as has been suggested by one leading agricultural researcher, Professor Joachim von Braun from Bonn University in Germany (von Braun, 2010).In the meantime, banks and hedge funds have also begun to invest in cash markets. In 2009, Goldman Sachs, Barclays and JP Morgan reportedly controlled physical commodities worth £16 billion—more than three times the amount they controlled in 2008. The head of one cocoa retail company commented on this development: “A lot of branch-alien money has poured into the market. The banks that are part of the game now are not giving us loans anymore or require much more collateral, as the markets have become more volatile. This is really grotesque” (Handelsblatt, 2010). This seems to be the next step in the ‘financialization'' of commodity markets, but the central question is whether banks should be able to buy our food or if they should get back to their initial purpose: serving the economy with credit.Food markets should serve the interests of people and not those of financial investorsFood markets should serve the interests of people and not those of financial investors. In this regard, politics has failed to protect food markets from excessive speculation. As former US President Bill Clinton said in a speech at the United Nations'' World Food Day on 16 October, 2008, “We need the World Bank, the IMF, all the big foundations, and all the governments to admit that, for 30 years, we all blew it, including me when I was President. We were wrong to believe that food was like some other product in international trade, and we all have to go back to a more responsible and sustainable form of agriculture” (Clinton, 2008).Given that hunger still exists in the world, even small price increases that are driven by financial investment are scandalous. We must not allow food to become a purely financial asset.? Open in a separate windowMarkus Henn

Science & Society Series on Food and Science

This article is part of the EMBO reports Science & Society series on ''food and science'' to highlight the role of natural and social sciences in understanding our relationship with food. We hope that the series serves a delightful menu of interesting articles for our readers.     

The Value of Learning about Natural History in Biodiversity Markets

Markets for biodiversity have generated much controversy because of the often unstated and untested assumptions included in transactions rules. Simple trading rules are favored to reduce transaction costs, but others have argued that this leads to markets that favor development and erode biodiversity. Here, I describe how embracing complexity and uncertainty within a tradable credit system for the Red-cockaded Woodpecker (Picoides borealis) creates opportunities to achieve financial and conservation goals simultaneously. Reversing the effects of habitat fragmentation is one of the main reasons for developing markets. I include uncertainty in habitat fragmentation effects by evaluating market transactions using five alternative dispersal models that were able to approximate observed patterns of occupancy and movement. Further, because dispersal habitat is often not included in market transactions, I contrast how changes in breeding versus dispersal habitat affect credit values. I use an individually-based, spatially-explicit population model for the Red-cockaded Woodpecker (Picoides borealis) to predict spatial- and temporal- influences of landscape change on species occurrence and genetic diversity. Results indicated that the probability of no net loss of abundance and genetic diversity responded differently to the transient dynamics in breeding and dispersal habitat. Trades that do not violate the abundance cap may simultaneously violate the cap for the erosion of genetic diversity. To highlight how economic incentives may help reduce uncertainty, I demonstrate tradeoffs between the value of tradable credits and the value of information needed to predict the influence of habitat trades on population viability. For the trade with the greatest uncertainty regarding the change in habitat fragmentation, I estimate that the value of using 13-years of data to reduce uncertainty in dispersal behaviors is $6.2 million. Future guidance for biodiversity markets should at least encourage the use of spatially- and temporally-explicit techniques that include population genetic estimates and the influence of uncertainty.     

The Application of Cash-Flow-at-Risk to Risk Management in a Deregulated Electricity Market

The current level of deregulation in electricity markets is continuing to expand. Although each of these markets has individual operational and financial structures, one common characteristic is volatility. This volatility is significant and time-varying, and the persistence of this volatility makes the management of financial risk a priority among market participants.

This article considers two applications of an innovative spot price model to risk management in such a market. The first application is the empirical estimation of risk premia in the market considered here. The results support other approaches, which find the risk premia to be both significant and time-variant. In addition, this work considers the application of a Cash-Flow-at-Risk (CFaR) approach to measuring and comparing financial risk among various portfolio alternatives. These portfolios are considered from the perspective of the electricity producer, and the electricity purchaser. This approach is flexible and practical, allowing the comparison among portfolios and across seasons. The results of this analysis show that derivative instruments are significantly over-priced in this market, and that producers have the opportunity to earn significant profits, above those justified by the inherent risk in the market.     

Impact of Stock Market Structure on Intertrade Time and Price Dynamics

We analyse times between consecutive transactions for a diverse group of stocks registered on the NYSE and NASDAQ markets, and we relate the dynamical properties of the intertrade times with those of the corresponding price fluctuations. We report that market structure strongly impacts the scale-invariant temporal organisation in the transaction timing of stocks, which we have observed to have long-range power-law correlations. Specifically, we find that, compared to NYSE stocks, stocks registered on the NASDAQ exhibit significantly stronger correlations in their transaction timing on scales within a trading day. Further, we find that companies that transfer from the NASDAQ to the NYSE show a reduction in the correlation strength of transaction timing on scales within a trading day, indicating influences of market structure. We also report a persistent decrease in correlation strength of intertrade times with increasing average intertrade time and with corresponding decrease in companies'' market capitalization–a trend which is less pronounced for NASDAQ stocks. Surprisingly, we observe that stronger power-law correlations in intertrade times are coupled with stronger power-law correlations in absolute price returns and higher price volatility, suggesting a strong link between the dynamical properties of intertrade times and the corresponding price fluctuations over a broad range of time scales. Comparing the NYSE and NASDAQ markets, we demonstrate that the stronger correlations we find in intertrade times for NASDAQ stocks are associated with stronger correlations in absolute price returns and with higher volatility, suggesting that market structure may affect price behavior through information contained in transaction timing. These findings do not support the hypothesis of universal scaling behavior in stock dynamics that is independent of company characteristics and stock market structure. Further, our results have implications for utilising transaction timing patterns in price prediction and risk management optimization on different stock markets.     

Human economic and financial behavior: The serotonergic hypothesis

Recent advances in the field of neuroeconomics and behavioral finance have shed new light on the biological correlates of human economic and financial behavior. In this context, a reduced serotonergic activity has been consistently linked to an increased rate of rejection of unfair offers in the ultimatum game (UG), a simple two-person bargaining between a proposer and a responder. Besides serotonin, increased testosterone levels have been associated to rejections of unfair UG offers, as well as to higher financial gains among professional traders operating in the London stock market. Since low serotonin and high testosterone levels in the central nervous system may interact to exert significant effects on the neural mechanisms involved in the expression of impulsivity and aggressive behavior, it is feasible to hypothesize that serotonergic neurotransmission might exert an important influence on investors' choices in real-world financial markets. Future studies in this area should explore whether tryptophan depletion may actually improve (or diminish) investors' trading performance.     

Potential Risk of Regional Disease Spread in West Africa through Cross-Border Cattle Trade

Background

Transboundary animal movements facilitate the spread of pathogens across large distances. Cross-border cattle trade is of economic and cultural importance in West Africa. This study explores the potential disease risk resulting from large-scale, cross-border cattle trade between Togo, Burkina Faso, Ghana, Benin, and Nigeria for the first time.

Methods and Principal Findings

A questionnaire-based survey of livestock movements of 226 cattle traders was conducted in the 9 biggest cattle markets of northern Togo in February-March 2012. More than half of the traders (53.5%) operated in at least one other country. Animal flows were stochastically simulated based on reported movements and the risk of regional disease spread assessed. More than three quarters (79.2%, range: 78.1–80.0%) of cattle flowing into the market system originated from other countries. Through the cattle market system of northern Togo, non-neighbouring countries were connected via potential routes for disease spread. Even for diseases with low transmissibility and low prevalence in a given country, there was a high risk of disease introduction into other countries.

Conclusions

By stochastically simulating data collected by interviewing cattle traders in northern Togo, this study identifies potential risks for regional disease spread in West Africa through cross-border cattle trade. The findings highlight that surveillance for emerging infectious diseases as well as control activities targeting endemic diseases in West Africa are likely to be ineffective if only conducted at a national level. A regional approach to disease surveillance, prevention and control is essential.     

Emergence of Cooperative Long-Term Market Loyalty in Double Auction Markets

Loyal buyer-seller relationships can arise by design, e.g. when a seller tailors a product to a specific market niche to accomplish the best possible returns, and buyers respond to the dedicated efforts the seller makes to meet their needs. We ask whether it is possible, instead, for loyalty to arise spontaneously, and in particular as a consequence of repeated interaction and co-adaptation among the agents in a market. We devise a stylized model of double auction markets and adaptive traders that incorporates these features. Traders choose where to trade (which market) and how to trade (to buy or to sell) based on their previous experience. We find that when the typical scale of market returns (or, at fixed scale of returns, the intensity of choice) become higher than some threshold, the preferred state of the system is segregated: both buyers and sellers are segmented into subgroups that are persistently loyal to one market over another. We characterize the segregated state analytically in the limit of large markets: it is stabilized by some agents acting cooperatively to enable trade, and provides higher rewards than its unsegregated counterpart both for individual traders and the population as a whole.     

Identifying live bird markets with the potential to act as reservoirs of avian influenza A (H5N1) virus: a survey in northern Viet Nam and Cambodia

Wet markets are common in many parts of the world and may promote the emergence, spread and maintenance of livestock pathogens, including zoonoses. A survey was conducted in order to assess the potential of Vietnamese and Cambodian live bird markets (LBMs) to sustain circulation of highly pathogenic avian influenza virus subtype H5N1 (HPAIV H5N1). Thirty Vietnamese and 8 Cambodian LBMs were visited, and structured interviews were conducted with the market managers and 561 Vietnamese and 84 Cambodian traders. Multivariate and cluster analysis were used to construct a typology of traders based on their poultry management practices. As a result of those practices and large poultry surplus (unsold poultry reoffered for sale the following day), some poultry traders were shown to promote conditions favorable for perpetuating HPAIV H5N1 in LBMs. More than 80% of these traders operated in LBMs located in the most densely populated areas, Ha Noi and Phnom Penh. The profiles of sellers operating at a given LBM could be reliably predicted using basic information about the location and type of market. Consequently, LBMs with the largest combination of risk factors for becoming virus reservoirs could be easily identified, potentially allowing control strategies to be appropriately targeted. These findings are of particular relevance to resource-scarce settings with extensively developed LBM systems, commonly found in South-East Asia.     

Organizing effects of testosterone and economic behavior: not just risk taking

Recent literature emphasizes the role that testosterone, as well as markers indicating early exposure to T and its organizing effect on the brain (such as the ratio of second to fourth finger, [Formula: see text]), have on performance in financial markets. These results may suggest that the main effect of T, either circulating or in fetal exposure, on economic behavior occurs through the increased willingness to take risks. However, these findings indicate that traders with a low digit ratio are not only more profitable, but more able to survive in the long run, thus the effect might consist of more than just lower risk aversion. In addition, recent literature suggests a positive correlation between abstract reasoning ability and higher willingness to take risks. To test the two hypotheses of testosterone on performance in financial activities (effect on risk attitude versus a complex effect involving risk attitude and reasoning ability), we gather data on the three variables in a sample of 188 ethnically homogeneous college students (Caucasians). We measure a [Formula: see text] digit ratio, abstract reasoning ability with the Raven Progressive Matrices task, and risk attitude with choice among lotteries. Low digit ratio in men is associated with higher risk taking and higher scores in abstract reasoning ability when a combined measure of risk aversion over different tasks is used. This explains both the higher performance and higher survival rate observed in traders, as well as the observed correlation between abstract reasoning ability and risk taking. We also analyze how much of the total effect of digit ratio on risk attitude is direct, and how much is mediated. Mediation analysis shows that a substantial part of the effect of T on attitude to risk is mediated by abstract reasoning ability.     

Analyzing the Long Term Cohesive Effect of Sector Specific Driving Forces

Financial markets are partially composed of sectors dominated by external driving forces, such as commodity prices, infrastructure and other indices. We characterize the statistical properties of such sectors and present a novel model for the coupling of the stock prices and their dominating driving forces, inspired by mean reverting stochastic processes. Using the model we were able to explain the market sectors’ long term behavior and estimate the coupling strength between stocks in financial markets and the sector specific driving forces. Notably, the analysis was successfully applied to the shipping market, in which the Baltic dry index (BDI), an assessment of the price of transporting the major raw materials by sea, influences the shipping financial market. We also present the analysis of other sectors—the gold mining market and the food production market, for which the model was also successfully applied. The model can serve as a general tool for characterizing the coupling between external forces and affected financial variables and therefore for estimating the risk in sectors and their vulnerability to external stress.     

Evolvement of uniformity and volatility in the stressed global financial village

Background

In the current era of strong worldwide market couplings the global financial village became highly prone to systemic collapses, events that can rapidly sweep throughout the entire village.

Methodology/Principal Findings

We present a new methodology to assess and quantify inter-market relations. The approach is based on the correlations between the market index, the index volatility, the market Index Cohesive Force and the meta-correlations (correlations between the intra-correlations.) We investigated the relations between six important world markets—U.S., U.K., Germany, Japan, China and India—from January 2000 until December 2010. We found that while the developed “western” markets (U.S., U.K., Germany) are highly correlated, the interdependencies between these markets and the developing “eastern” markets (India and China) are volatile and with noticeable maxima at times of global world events. The Japanese market switches “identity”—it switches between periods of high meta-correlations with the “western” markets and periods when it behaves more similarly to the “eastern” markets.

Conclusions/Significance

The methodological framework presented here provides a way to quantify the evolvement of interdependencies in the global market, evaluate a world financial network and quantify changes in the world inter market relations. Such changes can be used as precursors to the agitation of the global financial village. Hence, the new approach can help to develop a sensitive “financial seismograph” to detect early signs of global financial crises so they can be treated before they develop into worldwide events.     

Comparison of U.S. and Japanese Consumers’ Perceptions of Remanufactured Auto Parts

This study compares U.S. and Japanese consumers’ perceptions of remanufactured auto parts. Remanufactured parts have a long history and enjoy continuing success in the U.S. domestic aftermarket. In contrast, although Japan's domestic aftermarket is growing, it remains comparatively underdeveloped. This research examines whether customers’ perceptions of remanufactured products explain their lower acceptance in Japan. Our Internet survey of 440 U.S. and 300 Japanese respondents examined their knowledge of remanufactured auto parts, perceptions of their benefits and risks, and price consciousness. The results reveal that Japanese consumers know less about remanufactured products, perceiving them as entailing lower benefits and greater risk, especially concerning quality, and are less price conscious. Drawing on its results, this study suggests measures to promote markets for remanufactured auto parts in Japan and in economies in which such markets are in an early stage of development.