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Financialization of food - The determinants of the time-varying relation between agricultural prices and stock market dynamics

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  • Girardi, Daniele

Abstract

This paper studies the correlation of agricultural prices with stock market dynamics. We discuss the possible role of financial, macroeconomic and monetary factors in driving this time-varying relation, with the aim of understanding what has caused positive correlation between agricultural commodities and stocks in recent years. While previous works on commodity-equity correlation have focused on broad commodity indices, we study 16 main agricultural prices, in order to be able to assess patterns that are specific to agricultural commodities (but also differences across agricultural markets). We show that an explanation based on a combination of financialization and financial crisis is consistent with the empirical evidence, while global demand factors and monetary forces don't appear to play a significant role. In particular, we find that the correlation between agricultural price changes and stock market returns tends to get higher as the so-called TED spread (our proxy for financial turmoil) increases. Moreover, the impact of financial turmoil on the correlation gets stronger as the share of financial investors in agricultural derivatives markets (our proxy for financialization) rises. Our findings suggest that the influence of financial shocks on agricultural prices is likely to decrease as global financial tensions settle down but also that, as long as agricultural derivatives markets are populated mainly by financial investors, it can be expected to rise again when it is less needed, i.e. in the presence of new financial turmoil.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 52043.

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Date of creation: 10 Oct 2013
Date of revision: 16 Nov 2013
Handle: RePEc:pra:mprapa:52043

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Keywords: financialization; agricultural prices; DCC; cross-market correlations;

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  1. Schwert, G.W. & Seguin, P.J., 1988. "Heteroskedasticity In Stock Returns," Papers bc_88-02, Rochester, Business - General.
  2. Hong, Harrison & Yogo, Motohiro, 2012. "What does futures market interest tell us about the macroeconomy and asset prices?," Journal of Financial Economics, Elsevier, vol. 105(3), pages 473-490.
  3. David Bicchetti & Nicolas Maystre, 2012. "The Synchronized And Long-Lasting Structural Change On Commodity Markets: Evidence From High Frequency Data," UNCTAD Discussion Papers 208, United Nations Conference on Trade and Development.
  4. Gary Gorton & K. Rouwenhorst, 2004. "Facts and Fantasies about Commodity Futures," Yale School of Management Working Papers amz2619, Yale School of Management, revised 01 Mar 2005.
  5. Working, Holbrook, 1960. "Speculation on Hedging Markets," Food Research Institute Studies, Stanford University, Food Research Institute, issue 02, May.
  6. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  7. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
  8. Parantap Basu & William T. Gavin, 2011. "What explains the growth in commodity derivatives?," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 37-48.
  9. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  10. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  11. Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
  12. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425.
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