When it comes to index investors, more regulatory intervention is a mistake, argues new research from professors at Vanderbilt Owens Graduate School of Management in Nashville. The new study, Commodity Index Investing and Commodity Futures Prices, analyzes the role of commodity indexes on commodity futures markets. The study's authors are Hans Stoll, the Anne Marie and Thomas Walker Jr. Professor of Finance and co-director of the Financial Markets Research Center at Vanderbilt, and Robert Whaley, the Valere Blair Potter Professor of Management in Finance and co-director of the Financial Markets Research Center.

The study finds that commodity index investment, the practice by funds that buy baskets of commodities as a way to synthetically diversify an investment portfolio, is not speculation and that intervention by the Commodity Futures Trading Commission, urged by Congress, would harm more than help commodity futures markets.

"Commodity index rolls have little futures price impact, and inflows and outflows from commodity index investment do not cause futures prices to change," said Whaley.

Stoll said there's no doubt prices of a variety of commodities rose steeply in the 2007 to 2008 period, but he and Whaley believe there is considerable doubt that index investors caused the rise.

"Furthermore, prices have returned to more normal levels," said Stoll. "The current desire to intervene in markets is all the more surprising in view of the success with which futures markets weathered the recent credit crunch. No organized futures exchange ran into serious difficulty and all contracts on all futures exchanges were satisfied."

Stoll and Whaley also found the failure of the wheat futures prices to converge to the cash prices at the contract's expiration has not undermined the futures contract's effectiveness as a risk management tool.

The research was supported by a grant from Gresham Investment Management LLC and includes data from agriculture, livestock, industrial and precious metals, and energy commodities markets. It will be published in the Journal of Applied Finance.