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Commodity Market Linkages in the Global Financial Crisis: Excess Volatility and Development Impacts

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  • Machiko Nissanke
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    Abstract

    This article examines how the increased interactions of financial and commodity markets have served as one fast transmission channel of the global financial crisis to the developing world. It suggests that a significant portion of the closely synchronised price dynamics in commodity and financial markets is explained by market liquidity cycles in global finance, as financial investors manage their portfolio at ease through ‘virtual’ stock holdings of commodities in derivatives dealings and markets. The article further argues that this has generated price volatility well in excess of what could be explained in demand-supply fundamentals, and that under such conditions futures markets would cease to perform their intended functions -- that of price discovery and risk hedging for physical commodity stakeholders. It explores the development impacts of excess price volatility and the case for innovative price stabilisation mechanisms.

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    File URL: http://hdl.handle.net/10.1080/00220388.2011.649259
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Journal of Development Studies.

    Volume (Year): 48 (2012)
    Issue (Month): 6 (June)
    Pages: 732-750

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    Handle: RePEc:taf:jdevst:v:48:y:2012:i:6:p:732-750

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    Web page: http://www.tandfonline.com/FJDS20

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    Cited by:
    1. Chen, Wang & Hamori, Shigeyuki & Kinkyo, Takuji, 2014. "Macroeconomic impacts of oil prices and underlying financial shocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 1-12.
    2. Emiliano Magrini & Ayca Donmez, 2013. "Agricultural Commodity Price Volatility and Its Macroeconomic Determinants: A GARCH-MIDAS Approach," JRC-IPTS Working Papers JRC84138, Institute for Prospective and Technological Studies, Joint Research Centre.

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