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Hedging, arbitrage and the financialization of commodities markets

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  • Domenica Tropeano

    (University of Macerata)

Abstract

The paper provides an overview of the unfolding of the financialization of commodities in the 2000-2014 time frame. Different phases are described according to the positioning of the group of traders, their motivations, and the type of financial assets used to take a position in commodities. The main theme is the failure of arbitrage to level prices of similar financial assets traded in different markets. However, this failure does not depend on financing constraints suffered by arbitrageurs. Following Mirowski (2010) it is shown that arbitrage becomes a form of financial innovation rather than an equilibrating mechanism in contemporary financial markets. Historical accidents and changes in policy affect the positions of groups in the financial market game. The various strategies used are explained by creating a set of T accounts for the various groups that highlight the winners and the losers in the various phases.

Suggested Citation

  • Domenica Tropeano, 2016. "Hedging, arbitrage and the financialization of commodities markets," Working Papers 82-2016, Macerata University, Department of Finance and Economic Sciences, revised Sep 2016.
    • Handle: RePEc:mcr:wpdief:wpaper00082
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    References listed on IDEAS

    as
    1. Mirowski, Philip, 2010. "Inherent Vice: Minsky, Markomata, and the tendency of markets to undermine themselves," Journal of Institutional Economics, Cambridge University Press, vol. 6(4), pages 415-443, December.
    2. Degryse, H.A. & de Jong, F.C.J.M. & van Kervel, V.L., 2011. "The Impact of Dark and Visible Fragmentation on Market Quality (Replaces CentER Discussion Paper 2011-051)," Discussion Paper 2011-069, Tilburg University, Center for Economic Research.
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    7. Acharya, Viral V. & Lochstoer, Lars A. & Ramadorai, Tarun, 2013. "Limits to arbitrage and hedging: Evidence from commodity markets," Journal of Financial Economics, Elsevier, vol. 109(2), pages 441-465.
    8. Bicchetti, David & Maystre, Nicolas Maystre, 2013. "The synchronized and long-lasting structural change on commodity markets: Evidence from high frequency data," Algorithmic Finance, IOS Press, vol. 2(3-4), pages 233-239.
    9. Denis Gromb & Dimitri Vayanos, 2010. "Limits of Arbitrage," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 251-275, December.
    10. Lynne Chester, 2013. "The Organization, Operation, and Outcomes of Actually Existing Markets: A Suggested Approach for Empirical Analysis," American Journal of Economics and Sociology, Wiley Blackwell, vol. 72(2), pages 386-422, April.
    11. Adjemian, Michael K. & Garcia, Philip & Irwin, Scott & Smith, Aaron, 2013. "Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies," Economic Information Bulletin 155381, United States Department of Agriculture, Economic Research Service.
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    Cited by:

    1. Abeles, Martín & Pérez Caldentey, Esteban & Porcile, Gabriel, 2020. "The COVID-19 crisis and the structural problems of Latin America and the Caribbean: responding to the emergency with a long-term perspective," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.

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    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary; Modern Monetary Theory;
    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches

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