Keynes and the interwar commodity option markets

Abstract

In the first quarter of the twentieth century, options began to be widely employed in the main financial centres in Europe and the USA for trading in spot and futures markets. From 1921 onward, Keynes embarked upon investment in these derivatives mainly-but not exclusively-in the commodity markets, showing a true fascination for this method of speculation. This type of financial investment he pursued mainly in the 1920s, with only a few operations undertaken during the 1930s. The option markets in which Keynes traded were metals-in particular copper, lead, spelter and, especially, tin. Besides metals, Keynes dealt in options also in other commodity markets, such as rubber and linseed oil, and sparingly in ordinary stocks and government securities. In this paper we offer a reconstruction of Keynes's speculative activity in commodity options, drawing on the archival material kept in the Keynes Papers held at King's College, Cambridge. This reconstruction is, to the best of our knowledge, entirely new to the literature and aims to provide an analysis of this particular aspect of Keynes's investment behaviour, investigating his capacity to predict market trends and offering a preliminary assessment of his performance.

John Maynard Keynes: the economist as investor*

“…Rupert Trouton worked with Keynes for the Government during the First World War, was his student at Cambridge, and had a lot of dealings with him when he was at Buckmaster & Moore and Laurence, Keen & Gardner, which were King's main broker firms. It was Trouton who, in 1921, introduced Keynes to metal options (Marcuzzo and Sanfilippo 2016). He was a cofounder with Keynes and Falk of the AD Investment Trust and the P.R.…”

“…It is a well-established fact that, by this time, Keynes had decidedly shifted to the kind of buy-and-hold approach that is well exemplified in his college administration, and that Keynes based this strategy on limited diversification and a highly idiosyncratic selection of a restricted set of shares. Also, Marcuzzo and Sanfilippo (2016) found that Keynes basically gave up his dealings in options in the early 1930s, which can also be interpreted as a break in his style of investment. Less clear is why, and exactly when, Keynes changed his mind, and how the new stock-market strategy relates to the parallel investment in commodity and exchange markets.…”

“…Notwithstanding these difficulties, Keynes the investor has recently attracted the attention of several scholars and quite a few articles have come out in the last six years (Fantacci et al 2010;Holder and Kent 2011;Boyle et al 2012;Marcuzzo 2012;Chambers and Dimson 2013;2015;Wasik 2013;Woods 2013;Cristiano and Naldi 2014;Chambers et al 2015a;2015b;Accominotti and Chambers 2016;Chambers and Kabiri 2016;Marcuzzo and Sanfilippo 2016;Cristiano et al 2017;Foresti and Sanfilippo 2017;Marcuzzo and Rosselli 2018), adding to the hitherto sparse literature on the subject (Davenport 1975;Chua and Woodward 1983a;1983b;Pierce 1993;Mini 1995), besides of course the editorial notes in Vol XII of Keynes's Collected Writings (Moggridge 1983), which still remain the main and most authoritative reference.…”

“…During the 1920s, he made some profits in American Cotton (Cristiano and Naldi 2014) and Tin futures (Marcuzzo and Rosselli 2018), but he also incurred severe losses in rubber (CWK XII, p. 15), while options gained Keynes a total return on investment of 3 per cent over 12 years of activity. Taking the average yield of Consols as a benchmark, Marcuzzo and Sanfilippo (2016) have shown that this was no great performance: Consols averaged 4.5 per cent during the 1920s and 3.5 per cent in the 1930s.…”

Commodity option pricing efficiency before Black, Scholes, and Merton

“…Marcuzzo and Sanfilippo, ‘Keynes’; Fantacci, Marcuzzo, and Sanfilippo, ‘Speculation in commodities’; Cavalli and Christiano, ‘Keynes’ speculation’.…”