Strangling speculation: the effect of the 1903 Viennese futures trading ban

How does futures trading affect the intra-day volatility of spot prices? This paper contributes to the historical work on commodity markets, by using a unique early twentieth-century natural experiment to test what happens when futures trading no longer exists. In 1903, in an attempt to eliminate speculative behavior, futures trading in the Viennese grain market was banned. The permanency of this ban makes it ideal for studying its effect on volatility, using a difference-in-difference framework. Prices from Budapest, a market operating under similar conditions, sharing the same harvest regions, and embedded in a similar legal framework, are used as a control. The Budapest market constitutes an ideal control because it was unaffected by the ban and any migration of Austrian trading parties to this market was prohibited by law. This paper finds an increased intra-day volatility of spot prices and lower pricing accuracy on the Viennese spot market after the ban in comparison with Budapest, as the information-transmission and risk-allocation functions of this city's futures market were no longer maintained.