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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
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