Have Exchange Traded Funds Influenced Commodity Market Volatility?
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.
Volume (Year): 4 (2014)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.econjournals.com|
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Mitch Kosev & Thomas Williams, 2011. "Exchange-traded Funds," RBA Bulletin, Reserve Bank of Australia, pages 51-60, March.
When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2014-02-9. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ilhan Ozturk)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.