Abstract:A recent debate about the financialization of commodity markets has stimulated the development of new approaches to price formation which incorporate index traders as a new trader category. I survey these new approaches by retracing their emergence to traditional price formation models and show that they arise from a synthesis between commodity arbitrage pricing and behavioural pricing theories in the tradition of Keynesian inspired hedging pressure models. Based on these insights, I derive testable hypotheses… Show more
“…Moreover, investors use backwardation to make a profit through a rolling strategy. The latter is easily done by selling the expiring contract and use the proceeds to buy another futures contract for delivery at a more distant date (see Erb and Campbell, 2006;Valenti et al;.…”
Section: Figure 1: Impulse Response Functions Of the Endogenous Varia...mentioning
In this paper we develop a Structural Vector Autoregressive (SVAR) model of the global market for crude oil where the forward-looking expectations of oil traders are inferred from the financial markets. In this respect, we replace the global proxy for above-ground crude oil inventories with the oil futures-spot spread. The latter is defined as the percent deviation of the oil futures price from the spot price of oil and it represents a measure of the convenience yield but expressed with an opposite sign. The following model provides an economic interpretation of the residual structural shock, namely the financial market shock. This is designed to capture an unanticipated change in the benefit of holding crude oil inventories that is driven by financial incentives. We find evidence that financial market shocks have played an important role in explaining the surge of the real price of oil during the period 2003-2008.
“…Moreover, investors use backwardation to make a profit through a rolling strategy. The latter is easily done by selling the expiring contract and use the proceeds to buy another futures contract for delivery at a more distant date (see Erb and Campbell, 2006;Valenti et al;.…”
Section: Figure 1: Impulse Response Functions Of the Endogenous Varia...mentioning
In this paper we develop a Structural Vector Autoregressive (SVAR) model of the global market for crude oil where the forward-looking expectations of oil traders are inferred from the financial markets. In this respect, we replace the global proxy for above-ground crude oil inventories with the oil futures-spot spread. The latter is defined as the percent deviation of the oil futures price from the spot price of oil and it represents a measure of the convenience yield but expressed with an opposite sign. The following model provides an economic interpretation of the residual structural shock, namely the financial market shock. This is designed to capture an unanticipated change in the benefit of holding crude oil inventories that is driven by financial incentives. We find evidence that financial market shocks have played an important role in explaining the surge of the real price of oil during the period 2003-2008.
“…Lastly the IAS reflects the information set available to agents at the time they make their decisions in terms of production, consumption and investment strategies. Therefore, the IAS helps capturing the forward-looking component of the real price of crude oil through the feedback effect from the futures market to the spot market (see Singleton, 2014;Sockin and Xiong, 2015;Figuerola-Ferretti et al, 2020;van Huellen, 2020).…”
Section: The Role Of the Interest-adjusted Spread (Ias)mentioning
“…Lastly the IAS reflects the information set available to agents at the time they make their decisions in terms of production, consumption and investment strategies. Therefore, the IAS helps capturing the forward-looking component of the real price of crude oil through the feedback effect from the futures market to the spot market (see Singleton, 2014;Sockin and Xiong, 2015;Figuerola-Ferretti et al, 2020;van Huellen, 2020).…”
Section: The Role Of the Interest-adjusted Spread (Ias)mentioning
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