articleThe Journal of FinanceJul 13, 2016BRONZE OA

A Model of Financialization of Commodities

SBSuleyman BasakAPAnna Pavlova

University of St.Gallen · Lauder Business School · +4 more institutions

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Abstract

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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Topics & keywords

Topics
Keywords
  • Financialization
  • Futures contract
  • Commodity
  • Economics
  • Contango
  • Commodity pool
  • Financial economics
  • Index (typography)
UN Sustainable Development Goals
  • Decent work and economic growth
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