Financialization of commodities

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents inVol. 5 Issue 4 4-17 2011The basic theory of price formation tells us how the price of a particular asset will change based on the adjustment to its supply and demand. However, values of assets are also determined by other business fundamentals, company's and world events, human psychology, and investors' belief about the possible future profit. In recent history that lead to an increase of individual and institutional investors' interest in allocating their resources in commodity markets. With a large inflow of capital commodities' prices started to rise making them attractive components to effective investment portfolios. The presented paper addresses the issue of so called commodities 'financialization' process. It looks at the main factors standing behind commodities' price movements and to what extent financial market participants contributed to commodities price volatility in recent years. Based on the data examined it distinguishes the involvement of both commercial and non-commercial traders in short and long term periods of time. As well as explaining the impact of growing investors' interest in commodity markets it defines other market forces -like currency appreciations and emerging markets -as being part of increased volatility in raw and soft commodity markets. Along with market examination the paper focuses on possible future outcomes in attempts to regulate commodities derivatives markets and potential effects of those efforts.

Does the stock market drive herd behavior in commodity futures markets?

“…Sari, Hammoudeh, Chang, and McAleer (2012) suggest that increasing open interest implies a flow of new funds into the marketplace which can be associated with an up-trending or bull market. In fact, Falkowski (2011) notes a Commodity Futures Trading Commission (CFTC) staff report stating that the total value of various commodity index related instruments purchased by institutional investors increased from an estimated $15bn in 2003 to at least $200bn in mid-2008. To this end, one might argue that the dramatic increase in the flow of funds into commodity markets and the growing influence of financial investors in these markets, hence the term commodity financialization, is partly driven by herd behavior among market participants looking for improved returns from commodity investments.…”

Firm Size, Commodity Price, and Interdependence Between Firm-Level Stock Prices: The Case of Norwegian Salmon Industry

“…Recent research typically focuses on the impact of commodity financialization on commodity prices and the impact of commodity prices on the stock market (Falkowski, 2011). The large increase in commodity price volatilities can attribute partially to commodities' financialization process (Tang & Xiong, 2012).…”

Financialisation of the Commodity Markets. Conclusions from the VARX DCC GARCH

“…Basu and Gavin (2010) point out that the increase in the value of the futures market and the Otc by far exceeds the increase in production. Falkowski (2011) argues that the market for crude oil was 12-fold greater than the physical market in 2009 and the dynamic growth of the futures to spot market size 2 Estimates of the capital inflow on the commodity markets are varied. The CFTC et al (2008) estimate the institutional investors capital in the commodity markets to increase from $15 billion in 2003 to more than $200 billion in .…”