A model of financialization of commodities

Basak, S and Pavlova, A (2016) A model of financialization of commodities. The Journal Of Finance, 71 (4). pp. 1511-1556. ISSN 0022-1082 OPEN ACCESS

Abstract

We analyze how institutional investors entering commodity futures markets, referred to as the financialization of commodities, affect commodity prices. Institutional investors care about their performance relative to a commodity index. We find that all commodity futures prices, volatilities, and correlations go up with financialization, but more so for index futures than for nonindex futures. The equity-commodity correlations also increase. We demonstrate how financial markets transmit shocks not only to futures prices but also to commodity spot prices and inventories. Spot prices go up with financialization, and shocks to any index commodity spill over to all storable commodity prices.

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Item Type: Article
Subject Areas: Finance
Additional Information: © 2016 the American Finance Association. Funded by European Research Council Grant Number: StG263312
Funder Name: European Research Council
Subjects: C > Commodity futures markets
A > Assets
P > Price theory
Date Deposited: 18 Jul 2016 14:49
Last Modified: 16 Jan 2019 12:34
URI: http://lbsresearch.london.edu/id/eprint/516
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