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The Growing Interdependence Between Financial And Commodity Markets

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  • Jörg Mayer

Abstract

Financial investment has become increasingly important on commodity exchanges. This paper distinguishes two types of financial investors and emphasizes differences in their position taking motivation and price impacts. Index traders follow a passive strategy holding virtually only long positions. Money managers trade on both sides of the market and attempt to maximize short-term returns. Regression analysis indicates that: (i) index trader positions are particularly influenced by roll returns, while money managers emphasize spot returns; and that: (ii) money managers moved from emphasizing diversification to a more speculative strategy by taking commodity positions that are positively, rather than negatively, related to developments in equity markets. Granger-causality tests indicate that these differences translate into different price impacts: (i) index trader positions have a causal price impact particularly for agricultural commodities; and (ii) money managers had a causal impact during the sharp increases in the prices for some non-agricultural commodities.

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Bibliographic Info

Paper provided by United Nations Conference on Trade and Development in its series UNCTAD Discussion Papers with number 195.

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Date of creation: 2009
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Handle: RePEc:unc:dispap:195

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  1. Gary Gorton & Fumio Hayashi & K. Rouwenhorst, 2007. "The Fundamentals of Commodity Futures Returns," Yale School of Management Working Papers amz2605, Yale School of Management, revised 01 Oct 2008.
  2. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
  3. Capuano, Christian, 2006. "Strategic noise traders and liquidity pressure with a physically deliverable futures contract," International Review of Economics & Finance, Elsevier, vol. 15(1), pages 1-14.
  4. Christopher L. Gilbert, 2008. "How to Understand High Food Prices," Department of Economics Working Papers 0823, Department of Economics, University of Trento, Italia.
  5. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
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Cited by:
  1. Silvennoinen, Annastiina & Thorp, Susan, 2013. "Financialization, crisis and commodity correlation dynamics," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 42-65.
  2. Yilmaz Akyüz, 2012. "The Boom in Capital Flows to Developing Contries : Will It Go Bust Again?," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(1), pages 63-96, January.
  3. William Arrata & Alejandro Bernales & Virginie Coudert, 2013. "The Effects of Derivatives on Underlying Financial Markets: Equity Options, Commodity Derivatives and Credit Default Swaps," SUERF 50th Anniversary Volume Chapters, SUERF - The European Money and Finance Forum.
  4. Vijay Kumar Varadi, 2012. "An evidence of speculation in Indian commodity markets," EconStor Preprints 57430, ZBW - German National Library of Economics.
  5. Sophie van Huellen, 2013. "Price Non-Convergence in Commodities: A Case Study of the Wheat Conundrum," Working Papers 185, Department of Economics, SOAS, University of London, UK.
  6. Bernhard Troester, 2012. "The determinants of the recent food price surges – A basic supply and demand model," Competence Centre on Money, Trade, Finance and Development 1206, Hochschule fuer Technik und Wirtschaft, Berlin.
  7. Eduardo López E. & Víctor Riquelme P., 2010. "Auge, Colapso y Recuperación de los Precios de Materias Primas entre 2002 y 2010: ¿Qué Hay Detrás?," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(2), pages 129-145, April.
  8. Niels C. Thygesen & Robert N. McCauley & Guonan Ma & William R. White & Jakob de Haan & Willem van den End & Jon Frost & Christiaan Pattipeilohy & Mostafa Tabbae & Ernest Gnan & Morten Balling & Paul , 2013. "50 Years of Money and Finance: Lessons and Challenges," SUERF 50th Anniversary Volume - 50 Years of Money and Finance: Lessons and Challenges, SUERF - The European Money and Finance Forum, number 1 edited by Morten Balling & Ernest Gnan.

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