While on the faculty of Harvard University, Rausser initiated a hedge fund focusing on commodity market futures investment and trading and his experience actually revealed the overshooting phenomenon in the causal links between commodity futures prices, exchange rates, and interest rates. Shortly after he made this discovery, the famous Dornbusch article (get citation) on overshooting appeared. From his direct observations of the futures market, he was able to publish both before, during and after, a large number of scholarly works on commodity future markets. Based on these publications, he was selected as, on numerous occasions by the Chicago Board of Trade (CBT), the New York Mercantile Exchange (NYME), and the Chicago Mercantile Exchange (CME) to give formal presentations at their various conferences.
In terms of real-world impacts, through his courses on futures markets offered at Harvard University, he was able to get access to all of the large-scale econometric models that were offered commercially to the agribusiness industries. Based on Rausser and Just (1980) and Just and Rausser (1981), the first presented by Rausser at the CBT and the second published in the American Journal of Agricultural Economics (AJAE), which that year won the Outstanding Journal Article, it was shown that the probability distributions for futures forecast of subsequent spot prices were much more accurate than the forecast that were being generated by the commercial large-scale econometric models.
A number of representatives from Wharton and Chase Econometrics were very upset and tried to undermine Rausser’s analysis. They were unsuccessful and in the early 1980s, the agribusiness industry stopped paying fees for commodity priced forecasts from these various econometrics organizations. What’s also interesting is that even though the futures forecast dominated the econometric forecast, this does not deter from the Keynesian perspective. To recollection, none of those econometric models incorporated storage relationships for those commodities aside from live cattle, which as we know are non-storable.
Other commercial large-scale econometrics organizations, such as Doanes, Data Resources Incorporated, and the USDA, evaluated alternative forecast horizons covering one quarter, two quarters, three quarters and four quarters. For many of the commodities, there was a downward bias in the futures forecast. This, however, was not true for the livestock commodities. Even so, this forecast error from the futures market was generally more accurate in terms of bias while the econometric models were more accurate in terms of variance. The ultimate criteria that was used to make the evaluation was the root mean square errors. The results unfortunately were not as helpful to the Keynesian theory of backwardation; there is evidence that one cannot conclude, it is systematic across all commodities.
This stream of publications and real-world experiences led to a series of publications (the Journal of Finance, Journal of American Statistics Association, Journal of Monetary Economics, three articles in the Review of Economics and Statistics, AJAE, and a host of reprints and chapters in various book publications) on macroeconomic linkages with commodity markets whether spot or future. Rausser, Chalfant, Love and Stamoulis (1986) won the Outstanding Research Award for the year 1986 and demonstrated for the first time that U.S. agricultural policy programs that offers subsidization to the agricultural sector are justified by the external macroeconomic conditions reflected by exchange rates and interest rates. For the periods of time, characterized by the subsidies 1970s, the exchange rate, interest rate and inflation rates were all supportive of high commodity prices; those external forces to commodity futures markets actually provided subsidies to commodity markets. However, in the 1980s, the situation reversed, with the aforementioned rates running in the opposite direction and thus resulted in the taxation of agricultural companies, which, in turn, was offset by the agricultural and food policy interventions by the U.S. government that assisted those commodity assistances. No one has previously established these critically important causal links.
In the context of another real world problem, namely the Financial Crisis of 2007 and 2009, Rausser once again brought his fundamental understanding of derivates to explaining why a number of companies including AIG, Goldman Sachs, and the entire U.S. banking sector received huge subsidies from the U.S. government, which took equity position in each of the major banks and AIG (Rausser, Balson and Stevens, 2010; Balson and Rausser 2016).
Following the Great Recession of 2008-09, Dr. Rausser once again exerted a crucial influence on economic policy, this time in the U.S. Based on his award-winning work on futures markets and derivatives, he took note of Warren Buffet’s 2002 observation that “governments have so far found no effective way to control . . . the risks posed by these contracts,” and that derivatives constitute latent “financial weapons of mass destruction.” Motivated by this insight, Gordon Rausser and his colleagues designed a patent that focused on permissioning, counter-party risk, and avoidance of systemic risk, issued in 2010 and entitled “Integrated Electronic Exchange of Structured Contracts with Dynamic Risk-Based Transaction Permissioning.” This effort — along with numerous other publications, as well as consulting work with organized futures markets exchanges in the U.S. and England — formed part of the intellectual foundation for the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.