Assessing the Financialization Hypothesis

Abstract

The main objectives of this paper are to assess whether financialization can impact oil market behaviour over and above structural fundamental changes, and whether these changes affect final consumers' welfare. We build a calibrated macro-finance model of the oil market that solves for the term structure of spot prices and the futures price, as well as consumer welfare. While shifts arising in financial investors' preferences and wealth can explain the rise in participation of purely financial investors, they fail to explain key features such as the movements in the basis. Instead, anticipated changes in the physical layer of the oil market can better explain many of the features often attributed to financialization. We also find that greater financialization has no harmful effects on consumer welfare. Our paper shows that from a regulatory point of view, it is crucial in the first instance to identify the channels through which financialization can result in market failure and then design policies accordingly.JEL-Classification: C63, G12, G13, G17, Q43

Psychological barriers in oil futures markets

“…Panella et al (2014) point to the increase in global commodity assets under management from $10 billion in 2001 to $400 billion in 2011, the generation of $5 billion annually in banking fees from commodity investment activity since 2005 and the observation by Ghalayini (2011) that WTI trading volume has increased from 130% of US oil demand in 1990 to 700% of US oil demand in 2011. Much debate abounds on the extent and effect of speculative trading on energy markets, with increased recent research output on the topic (Acharya et al, 2013;Fattouh and Mahadeva, 2012;Hache and Lantz, 2013;Tokic, 2011). While, Fattouh and Mahadeva (2012) argue that there are data availability issues in researching the effect, there is some recent research suggesting that the presence of speculative traders is linked to behaviour in the pricing of oil futures (Acharya et al, 2013).…”

“…Much debate abounds on the extent and effect of speculative trading on energy markets, with increased recent research output on the topic (Acharya et al, 2013;Fattouh and Mahadeva, 2012;Hache and Lantz, 2013;Tokic, 2011). While, Fattouh and Mahadeva (2012) argue that there are data availability issues in researching the effect, there is some recent research suggesting that the presence of speculative traders is linked to behaviour in the pricing of oil futures (Acharya et al, 2013). Thus, while tentative, the financialization hypothesis suggests an avenue by which biases in professional trader behaviour known to exist in other markets might also be present in oil futures markets.…”

Maximização do valor para o acionista na indústria mundial do petróleo

“…Por um período, esses investidores mantinham distância das operações com commodities, devido ao risco intrínseco das operações. Essa orientação se altera a partir do início do século XXI, com a penetração massiva desses investidores em atividades mais arriscadas, concomitantemente à proliferação de instrumentos financeiros que permitiram alavancar a especulação a partir do petróleo (EDERER et al, 2016;FATTOUH & MAHADEVA, 2012). Recentemente, é possível observar uma tendência dos fundos financeiros no sentido de se afastar da exposição ao setor.…”