IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v70y2024i4p2122-2143.html

Financialization and Commodity Markets Serial Dependence

Author

Listed:
  • Zhi Da

    (Department of Finance, Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

  • Ke Tang

    (Institute of Economics, School of Social Sciences, Tsinghua University, Beijing 100084, China)

  • Yubo Tao

    (Department of Economics, Faculty of Social Sciences, and Asia-Pacific Academy of Economics and Management, University of Macau, Macau Special Administrative Region 999078, China)

  • Liyan Yang

    (Department of Finance, Joseph L. Rotman School of Management, University of Toronto, Toronto, Ontario M5S3E6, Canada; Guanghua School of Management, Peking University, Peking 100871, China)

Abstract

Recent financialization in commodity markets makes it easier for institutional investors to trade a portfolio of commodities via various commodity-indexed products. We present several pieces of novel causal evidence that daily exposure to such index trading results in price overshoots and reversals, as reflected in negative daily return autocorrelations, only among commodities in that index. This is because index trading propagates nonfundamental noise to all indexed commodities. We present direct evidence for such noise propagation using commodity news sentiment data.

Suggested Citation

  • Zhi Da & Ke Tang & Yubo Tao & Liyan Yang, 2024. "Financialization and Commodity Markets Serial Dependence," Management Science, INFORMS, vol. 70(4), pages 2122-2143, April.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:4:p:2122-2143
    DOI: 10.1287/mnsc.2023.4797
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.2023.4797
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.2023.4797?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Doron Israeli & Charles M. C. Lee & Suhas A. Sridharan, 2017. "Is there a dark side to exchange traded funds? An information perspective," Review of Accounting Studies, Springer, vol. 22(3), pages 1048-1083, September.
    2. Acemoglu, Daron & Johnson, Simon & Kermani, Amir & Kwak, James & Mitton, Todd, 2016. "The value of connections in turbulent times: Evidence from the United States," Journal of Financial Economics, Elsevier, vol. 121(2), pages 368-391.
    3. Bianchi, Robert J. & Drew, Michael E. & Fan, John Hua, 2016. "Commodities momentum: A behavioral perspective," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 133-150.
    4. John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1993. "Trading Volume and Serial Correlation in Stock Returns," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(4), pages 905-939.
    5. Ing-Haw Cheng & Wei Xiong, 2014. "Financialization of Commodity Markets," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 419-441, December.
    6. repec:bla:jfinan:v:59:y:2004:i:4:p:1901-1930 is not listed on IDEAS
    7. Stefan Nagel, 2012. "Evaporating Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2005-2039.
    8. Robin Greenwood, 2008. "Excess Comovement of Stock Returns: Evidence from Cross-Sectional Variation in Nikkei 225 Weights," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1153-1186, May.
    9. Christopher L. Gilbert, 2010. "How to Understand High Food Prices," Journal of Agricultural Economics, Wiley Blackwell, vol. 61(2), pages 398-425, June.
    10. Itzhak Ben‐David & Francesco Franzoni & Rabih Moussawi, 2018. "Do ETFs Increase Volatility?," Journal of Finance, American Finance Association, vol. 73(6), pages 2471-2535, December.
    11. Itay Goldstein & Liyan Yang, 2022. "Commodity Financialization and Information Transmission," Journal of Finance, American Finance Association, vol. 77(5), pages 2613-2667, October.
    12. Zhi Da & Sophie Shive, 2018. "Exchange traded funds and asset return correlations," European Financial Management, European Financial Management Association, vol. 24(1), pages 136-168, January.
    13. repec:aen:journl:2011v32-02-a07 is not listed on IDEAS
    14. Suleyman Basak & Anna Pavlova, 2016. "A Model of Financialization of Commodities," Journal of Finance, American Finance Association, vol. 71(4), pages 1511-1556, August.
    15. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    16. Mehdi Arzandeh & Julieta Frank, 2019. "Price Discovery in Agricultural Futures Markets: Should We Look beyond the Best Bid‐Ask Spread?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 101(5), pages 1482-1498, October.
    17. Jonathan Brogaard & Matthew C Ringgenberg & David Sovich, 2019. "The Economic Impact of Index Investing," The Review of Financial Studies, Society for Financial Studies, vol. 32(9), pages 3461-3499.
    18. Baker, Malcolm & Stein, Jeremy C., 2004. "Market liquidity as a sentiment indicator," Journal of Financial Markets, Elsevier, vol. 7(3), pages 271-299, June.
    19. Bahattin Büyükşahin & Jeffrey H. Harris, 2011. "Do Speculators Drive Crude Oil Futures Prices?," The Energy Journal, , vol. 32(2), pages 167-202, April.
    20. Ke Tang & Wei Xiong, 2012. "Index Investment and the Financialization of Commodities," Financial Analysts Journal, Taylor & Francis Journals, vol. 68(6), pages 54-74, November.
    21. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    22. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 187-205, February.
    23. Brian J. Henderson & Neil D. Pearson & Li Wang, 2015. "Editor's Choice New Evidence on the Financialization of Commodity Markets," The Review of Financial Studies, Society for Financial Studies, vol. 28(5), pages 1285-1311.
    24. Paul C. Tetlock, 2007. "Giving Content to Investor Sentiment: The Role of Media in the Stock Market," Journal of Finance, American Finance Association, vol. 62(3), pages 1139-1168, June.
    25. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, vol. 93(1), pages 113-132, March.
    26. Mehdi Arzandeh & Julieta Frank, 2019. "Price Discovery in Agricultural Futures Markets: Should We Look beyond the Best Bid-Ask Spread?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(5), pages 1482-1498.
    27. Alberto Abadie, 2021. "Using Synthetic Controls: Feasibility, Data Requirements, and Methodological Aspects," Journal of Economic Literature, American Economic Association, vol. 59(2), pages 391-425, June.
    28. Michael Sockin & Wei Xiong, 2015. "Informational Frictions and Commodity Markets," Journal of Finance, American Finance Association, vol. 70(5), pages 2063-2098, October.
    29. Philip Bond & Diego García, 2022. "The Equilibrium Consequences of Indexing," The Review of Financial Studies, Society for Financial Studies, vol. 35(7), pages 3175-3230.
    30. Baltussen, Guido & van Bekkum, Sjoerd & Da, Zhi, 2019. "Indexing and stock market serial dependence around the world," Journal of Financial Economics, Elsevier, vol. 132(1), pages 26-48.
    31. Hong, Harrison & Kubik, Jeffrey D. & Fishman, Tal, 2012. "Do arbitrageurs amplify economic shocks?," Journal of Financial Economics, Elsevier, vol. 103(3), pages 454-470.
    32. David C Brown & Shaun William Davies & Matthew C Ringgenberg, 2021. "ETF Arbitrage, Non-Fundamental Demand, and Return Predictability [The equity share in new issues and aggregate stock returns]," Review of Finance, European Finance Association, vol. 25(4), pages 937-972.
    33. Marta Szymanowska & Frans Roon & Theo Nijman & Rob Goorbergh, 2014. "An Anatomy of Commodity Futures Risk Premia," Journal of Finance, American Finance Association, vol. 69(1), pages 453-482, February.
    34. Wenjin Kang & K. Geert Rouwenhorst & Ke Tang, 2020. "A Tale of Two Premiums: The Role of Hedgers and Speculators in Commodity Futures Markets," Journal of Finance, American Finance Association, vol. 75(1), pages 377-417, February.
    35. Abadie, Alberto & Diamond, Alexis & Hainmueller, Jens, 2010. "Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program," Journal of the American Statistical Association, American Statistical Association, vol. 105(490), pages 493-505.
    36. Mark J Ready & Robert C Ready, 2022. "Order Flows and Financial Investor Impacts in Commodity Futures Markets," The Review of Financial Studies, Society for Financial Studies, vol. 35(10), pages 4712-4755.
    37. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56, pages 187-205, February.
    38. Irwin, Scott H. & Sanders, Dwight R., 2012. "Testing the Masters Hypothesis in commodity futures markets," Energy Economics, Elsevier, vol. 34(1), pages 256-269.
    39. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
    40. Ben R. Marshall & Nhut H. Nguyen & Nuttawat Visaltanachoti, 2012. "Commodity Liquidity Measurement and Transaction Costs," The Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 599-638.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Haonan & Zhang, Qinghua & Chen, Jian, 2025. "The impact of excessive financial investment on corporate risk," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    2. Glück, Thorsten & Adams, Zeno, 2025. "Systemic risk of commodity traders," Journal of Economic Dynamics and Control, Elsevier, vol. 179(C).
    3. Bei, Zeyun & Cui, Liyuan & Zhou, Yinggang, 2026. "Liquidity, sentiment, and global spillover across financial markets," Journal of International Money and Finance, Elsevier, vol. 161(C).
    4. Yuan Li & Fang Liu & Wei He, 2025. "Sentiment and Futures Returns in Chinese Agricultural Futures Markets," SAGE Open, , vol. 15(2), pages 21582440251, April.
    5. DeCoste, Joseph, 2025. "Does excess futures market demand affect the spot price of oil?," Energy Economics, Elsevier, vol. 149(C).
    6. Yang, Jie & Feng, Yun & Yang, Hao, 2024. "Scrutinizing multi-scale and multi-quantile interactions in commodity markets: A petrochemical industrial chain perspective," Energy Economics, Elsevier, vol. 140(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bohl, Martin T. & Irwin, Scott H. & Pütz, Alexander & Sulewski, Christoph, 2023. "The impact of financialization on the efficiency of commodity futures markets," Journal of Commodity Markets, Elsevier, vol. 31(C).
    2. DeCoste, Joseph, 2025. "Comovement and S&P 500 membership," Global Finance Journal, Elsevier, vol. 65(C).
    3. Chincarini, Ludwig B. & Moneta, Fabio, 2021. "The challenges of oil investing: Contango and the financialization of commodities," Energy Economics, Elsevier, vol. 102(C).
    4. DeCoste, Joseph, 2025. "Does excess futures market demand affect the spot price of oil?," Energy Economics, Elsevier, vol. 149(C).
    5. Nakagawa, Kei & Sakemoto, Ryuta, 2024. "Commodity sectors and factor investment strategies," International Review of Financial Analysis, Elsevier, vol. 95(PC).
    6. Melone, Alessandro & Randl, Otto & Sögner, Leopold & Zechner, Josef, 2025. "Stock-Oil Comovement: Cash Flows or Discount Rates?," VfS Annual Conference 2025 (Cologne): Revival of Industrial Policy 325398, Verein für Socialpolitik / German Economic Association.
    7. Tobias Lauter & Marcel Prokopczuk & Stefan Trück, 2026. "Commodity financialization and electronification: evidence from high-frequency data," Review of Derivatives Research, Springer, vol. 29(1), pages 1-29, December.
    8. Kang, Wenjin & Tang, Ke & Wang, Ningli, 2023. "Financialization of commodity markets ten years later," Journal of Commodity Markets, Elsevier, vol. 30(C).
    9. Martin T. Bohl & Niklas Humann & Pierre L. Siklos, 2026. "The Monetary Policy–Commodities Nexus: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 40(2), pages 1050-1082, April.
    10. Yang, Baochen & Xu, Jingru & Dai, Yuxuan & Zhang, Yongjie & Geng, Peixuan, 2025. "Commodity financialization and firm investment:Implications for market efficiency and economic stability in emerging markets," International Review of Economics & Finance, Elsevier, vol. 99(C).
    11. Jamel Boukhatem & Ali M. Alhazmi, 2024. "COVID-19 pandemic, oil prices and Saudi stock market: empirical evidence from ARDL modeling and Bayer–Hanck cointegration approach," Future Business Journal, Springer, vol. 10(1), pages 1-14, December.
    12. Yan, Lei & Irwin, Scott H., 2016. "Identifying the Impact of Financialization on Commodity Futures Prices," 2016 Conference, April 18-19, 2016, St. Louis, Missouri 285846, NCR-134/ NCCC-134 Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    13. Bierbaumer, Daniel & Rieth, Malte & Velinov, Anton, 2021. "The state-dependent trading behavior of banks in the oil futures market," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 1011-1024.
    14. Itay Goldstein & Liyan Yang, 2022. "Commodity Financialization and Information Transmission," Journal of Finance, American Finance Association, vol. 77(5), pages 2613-2667, October.
    15. Nikolaos T. Milonas & Evangelia K. Photina, 2024. "The convenience yield under commodity financialization," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(4), pages 631-652, April.
    16. Rajvanshi, Vivek & Sahoo, Gouri Sankar & Bansal, Avijit, 2025. "Internationalization: The impact of commodity futures market expansion on market quality," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    17. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., 2018. "Mapping algorithms, agricultural futures, and the relationship between commodity investment flows and crude oil futures prices," Energy Economics, Elsevier, vol. 72(C), pages 486-504.
    18. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.
    19. Hang Shao & Zhou Li, 2025. "The predictive effect of heterogeneous investor behavior on commodity pricing," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 12(1), pages 1-12, December.
    20. Bonnier, Jean-Baptiste, 2021. "Speculation and informational efficiency in commodity futures markets," Journal of International Money and Finance, Elsevier, vol. 117(C).

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:70:y:2024:i:4:p:2122-2143. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.