The Valuation Effects of Index Investment in Commodity Futures

A tale of two premiums revisited

“…The average share of CITs is 2.53% in the prefinancialization period and 6.25% after. This confirms the sharp increase in CIT investment and the identified break date; see Dubois and Maréchal (2021). The energy group experiences the largest increase (e.g., the crude oil contract from 3.73% to 10.63%), and the $$CIT$$ of all contracts increase over the period.…”

“…In particular, Masters and White (2008) and Masters (2008), in a public hearing before the US Senate, argue that the sharp increase in the share of index investing in the total open interest of commodities was responsible for market distortions and prices misaligned with their fundamental values. Typically, the financialization generates excess co-movements between commodity futures prices (Tang & Xiong, 2012), increases the correlation between commodities and stock markets (Buyuksahin & Robe, 2014), induces price pressure effects during the roll of the larges commodity indices (Mou, 2011), and changes in the risk-sharing structure of commodity markets; see Brunetti and Reiffen (2014), and Dubois and Maréchal (2021). The date attributed to the materialization of the financialization varies across studies from 1999 (Mou, 2011) to 2008 (Adams & Gluck, 2015), but the consensus and the statistical evidence point to December 2003; see Dubois and Maréchal (2021).…”

“…Typically, the financialization generates excess co-movements between commodity futures prices (Tang & Xiong, 2012), increases the correlation between commodities and stock markets (Buyuksahin & Robe, 2014), induces price pressure effects during the roll of the larges commodity indices (Mou, 2011), and changes in the risk-sharing structure of commodity markets; see Brunetti and Reiffen (2014), and Dubois and Maréchal (2021). The date attributed to the materialization of the financialization varies across studies from 1999 (Mou, 2011) to 2008 (Adams & Gluck, 2015), but the consensus and the statistical evidence point to December 2003; see Dubois and Maréchal (2021). Brunetti and Reiffen (2014) derive a model in which uninformed CITs mitigate hedging costs.…”