A Model of Financialization of Commodities. (13th July 2016)

• Record Type: Journal Article
• Authors: BASAK, SULEYMAN; PAVLOVA, ANNA
• Is Part Of: Journal of finance. Volume 71:Number 4(2016:Aug.)
• Page Start: 1511
• Page End: 1556
• Publication Date: 2016-07-13
• Subjects: Finance -- Periodicals; Finance -- United States -- Periodicals; 332.05
• DOI: 10.1111/jofi.12408
• Languages: English
• ISSNs: 0022-1082

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.