How the financial market can dampen the effects of commodity price shocks

Price overreactions in the commodity futures market: An intraday analysis of the Covid-19 pandemic impact

“…According to Adams et al (2020) , the financialization of commodity markets started in 2004 when inflows into the commodity market increased from $15 billion to more than $450 billion in April 2011 ( Bicchetti and Maystre, 2013 ). According to Kim (2020) , trading in commodity derivatives increased massively in the mid-2000s while Adams et al (2020) underline that financialization indicators for commodities became stronger during the 2008–2009 global financial crisis. On the other hand, Bianchi et al (2020) state that this financialization is cyclable as they also observe a de-financialization of metals and agricultural markets from 2014 to 2017.…”

“…With this high importance, commodities have been progressively financialized with trading operations on the stock exchanges and derivative markets (e.g. Kim, 2020 ; Hu et al, 2020 ; Nguyen et al, 2020 ). On the other hand, the Covid-19 pandemic has generated huge impacts on the real economy with a worldwide lockdown over several months.…”

The US banks’ balance sheet transmission channel of oil price shocks

“…Turning to banking, Kim (2020) explains the recently lessened impacts of commodity price shocks on the US economy with the increase, since the mid-2000s, in trading in commodity derivatives that are, in turn, included by banks among their assets. He rationalizes his empirical findings by postulating a structural model with financial intermediaries holding commodity derivatives on the asset side of their balance sheets.…”

“…For the sake of our analysis, it is worth stressing that researchers have been proposing and analyzing many different direct and indirect channels through which oil price shocks can transmit to the macroeconomy, in particular the economies of oil-importing countries such as the US, 1 including, among others, the input-cost channel (Kim andLoungani, 1992, Backus andCrucini, 2000), the imperfect competition channel through large and timevarying markups (Rotemberg and Woodford, 1996), the capital-energy complementarities in production channel (Atkeson and Kehoe, 1999), and the energy channel through capital utilization and capital stock (Finn, 2000). Moreover, Hamilton (2008) highlights the disruption in consumers' and firms' spending on goods and services other than energy.…”

An Approach to Forecasting Commodity Futures Prices Using Machine Learning

“…For Kim [2], it is commonly accepted that there is an inverse relationship between commodity prices such as oil, wheat, base metals, etc. and the economy: when commodity prices fall, the economic effects are positive.…”