Financialization and commodity excess spillovers

To identify the relationship between financialization and cross-commodity linkages, this paper proposes the framework of excess spillovers which deals with the connectedness across multiple commodity prices that cannot be explained by macroeconomic fundamentals. We document that excess spillovers rose dramatically over the 2004–2008 period and peaked during the global financial crisis. The intensity of excess spillovers is significantly positively related to the extent of participation by financial investors, and the majority of the variation in excess spillovers can be attributed to activities of managed money traders and index traders. Besides, commodity markets with a higher degree of managed money participation are more likely to be net transmitters of excess spillovers. In contrast, commodity markets with a higher degree of index fund participation are more likely to be net receivers. Overall, our analysis verifies that the increasing integration of commodity markets is the new normal led by financialization, rather than a temporary change caused by fundamentals.