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Volatility Spillovers Arising from the Financialization of Commodities

Author

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  • Wing Hong Chan

    (Department of Economics, Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

  • Bryce Shelton

    (Department of Economics, Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

  • Yan Wendy Wu

    (Department of Economics, Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, ON N2L 3C5, Canada)

Abstract

This paper examines whether the proliferation of new index products, such as commodity-tracking exchange-traded funds (ETFs), amplified the volatility transmission channel introduced by financialization. This paper focuses on the volatility spillover effects among crude oil, metals, agriculture, and non-energy commodity markets. The results show financialization has an impact on the volatility of commodity prices, predominantly for non-energy commodities. However, the impact on volatility is not symmetric across all commodities. The analysis of index investment and investors’ positions in futures markets shows that, when a relationship exists, it is generally negatively correlated with the realized volatility of non-energy commodities. Using realized volatility in the difference-in-difference model provides estimates that are inconsistent with other findings that non-energy commodities, traded as a part of indices, have experienced higher volatility. The results are similar to the index investment and futures market analysis, where increased participation by investors through new investment products has put download pressure on realized volatility.

Suggested Citation

  • Wing Hong Chan & Bryce Shelton & Yan Wendy Wu, 2018. "Volatility Spillovers Arising from the Financialization of Commodities," JRFM, MDPI, vol. 11(4), pages 1-12, October.
    • Handle: RePEc:gam:jjrfmx:v:11:y:2018:i:4:p:72-:d:178751
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    References listed on IDEAS

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    5. Adams, Zeno & Glueck, Thorsten, 2014. "Financialization in Commodity Markets: A Passing Trend or the New Normal?," Working Papers on Finance 1413, University of St. Gallen, School of Finance, revised Aug 2015.
    6. 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.
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    Cited by:

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    3. Dimitrios Vortelinos & Angeliki Menegaki & Ioannis Passas & Alexandros Garefalakis & Georgios Viskadouros, 2024. "Heterogeneous Responses of Energy and Non-Energy Assets to Crises in Commodity Markets," Energies, MDPI, vol. 17(21), pages 1-25, October.
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