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Have Exchange Traded Funds Influenced Commodity Market Volatility?

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Author Info

  • Shaen Corbet

    (DCU Business School (DCUBS), Dublin City University (DCU), Dublin 9, Ireland)

  • Cian Twomey

    (J.E. Cairnes School of Business and Economics, National University of Ireland, Galway (NUIG), Ireland.)

Abstract

Exchange Traded Funds (ETFs) have existed since the late 1980s, but were first traded on commodity markets in the early 2000s. Their inception has been linked by some market analysts with the large commodity price increases and volatility evident between 2007 and 2009. This research analyses forty-four ETFs across seventeen commodity markets and focuses on the role that the product has played, either as an accelerant for mispricing in international commodity markets, or as a mechanism for liquidity improvements, thereby increasing the speed of the transfer of information. An EGARCH model is used to investigate whether the volatility and liquidity effects are more pronounced in larger or smaller sized commodity markets. The results indicate that larger market proportional ETF holdings are associated with higher EGARCH volatility. Smaller commodity markets are found to have increased liquidity flows, indicating benefits from ETF investment. The findings in this paper support calls for more intense regulation of the ETF industry and more investigation into the investment practices and rebalancing processes of the funds in question. The need for regulation of investment size and the imposition of market ownership caps cannot be rejected.

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Bibliographic Info

Article provided by Econjournals in its journal International Journal of Economics and Financial Issues.

Volume (Year): 4 (2014)
Issue (Month): 2 ()
Pages: 323-335

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Handle: RePEc:eco:journ1:2014-02-9

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Related research

Keywords: Exchange Traded Funds (ETFs); commodity markets; volatility.;

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  1. Jeff Madura & Thanh Ngo, 2008. "Impact of ETF inception on the valuation and trading of component stocks," Applied Financial Economics, Taylor & Francis Journals, vol. 18(12), pages 995-1007.
  2. Pierluigi Bologna & Laura Cavallo, 2002. "Does the introduction of stock index futures effectively reduce stock market volatility? Is the 'futures effect' immediate? Evidence from the Italian stock exchange using GARCH," Applied Financial Economics, Taylor & Francis Journals, vol. 12(3), pages 183-192.
  3. Brandt, Michael W. & Jones, Christopher S., 2006. "Volatility Forecasting With Range-Based EGARCH Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 24, pages 470-486, October.
  4. Evangelos Drimbetas & Nikolaos Sariannidis & Nicos Porfiris, 2007. "The effect of derivatives trading on volatility of the underlying asset: evidence from the Greek stock market," Applied Financial Economics, Taylor & Francis Journals, vol. 17(2), pages 139-148.
  5. Timothy Jares & Angeline Lavin, 2004. "Japan and Hong Kong Exchange-Traded Funds (ETFs): Discounts, Returns, and Trading Strategies," Journal of Financial Services Research, Springer, vol. 25(1), pages 57-69, February.
  6. Mitch Kosev & Thomas Williams, 2011. "Exchange-traded Funds," RBA Bulletin, Reserve Bank of Australia, pages 51-60, March.
  7. Harper, Joel T. & Madura, Jeff & Schnusenberg, Oliver, 2006. "Performance comparison between exchange-traded funds and closed-end country funds," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 16(2), pages 104-122, April.
  8. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  9. Corredor Pilar & Santamaria Rafael, 2002. "Does derivatives trading destabilize the underlying assets? Evidence from the Spanish stock market," Applied Economics Letters, Taylor & Francis Journals, vol. 9(2), pages 107-110.
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