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Commodity Market Linkages in the Global Financial Crisis: Excess Volatility and Development Impacts

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  • Machiko Nissanke

Abstract

This article examines how the increased interactions of financial and commodity markets have served as one fast transmission channel of the global financial crisis to the developing world. It suggests that a significant portion of the closely synchronised price dynamics in commodity and financial markets is explained by market liquidity cycles in global finance, as financial investors manage their portfolio at ease through ‘virtual’ stock holdings of commodities in derivatives dealings and markets. The article further argues that this has generated price volatility well in excess of what could be explained in demand-supply fundamentals, and that under such conditions futures markets would cease to perform their intended functions -- that of price discovery and risk hedging for physical commodity stakeholders. It explores the development impacts of excess price volatility and the case for innovative price stabilisation mechanisms.

Suggested Citation

  • Machiko Nissanke, 2012. "Commodity Market Linkages in the Global Financial Crisis: Excess Volatility and Development Impacts," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 732-750, June.
  • Handle: RePEc:taf:jdevst:v:48:y:2012:i:6:p:732-750
    DOI: 10.1080/00220388.2011.649259
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    File URL: http://hdl.handle.net/10.1080/00220388.2011.649259
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    References listed on IDEAS

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    1. Ke Tang & Wei Xiong, 2010. "Index Investment and Financialization of Commodities," NBER Working Papers 16385, National Bureau of Economic Research, Inc.
    2. World Bank, 2009. "Global Economic Prospects 2009 : Commodities at the Crossroads," World Bank Publications, The World Bank, number 2581.
    3. Jörg Mayer, 2009. "The Growing Interdependence Between Financial And Commodity Markets," UNCTAD Discussion Papers 195, United Nations Conference on Trade and Development.
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    Cited by:

    1. Kuruppuarachchi, Duminda & Premachandra, I.M., 2016. "Information spillover dynamics of the energy futures market sector: A novel common factor approach," Energy Economics, Elsevier, vol. 57(C), pages 277-294.
    2. Kritika Mathur & Nidhi Kaicker & Raghav Gaiha & Katsushi S. Imai & Ganesh Thapa, 2014. "Financialisation of food commodity markets, price surge and volatility: new evidence," Chapters,in: Handbook on Food, chapter 7, pages 149-176 Edward Elgar Publishing.
    3. Manera, Matteo & Nicolini, Marcella & Vignati, Ilaria, 2016. "Modelling futures price volatility in energy markets: Is there a role for financial speculation?," Energy Economics, Elsevier, vol. 53(C), pages 220-229.
    4. Küblböck, Karin, 2013. "The EU Raw Materials Initiative: Scope and critical assessment," Briefing Papers 8, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    5. Nissanke Machiko, 2015. "A Quest for Institutional Foundations Towards Inclusive Development in Sub-Saharan Africa," WIDER Working Paper Series 049, World Institute for Development Economic Research (UNU-WIDER).
    6. Emiliano Magrini & Ayca Donmez, 2013. "Agricultural Commodity Price Volatility and Its Macroeconomic Determinants: A GARCH-MIDAS Approach," JRC Working Papers JRC84138, Joint Research Centre (Seville site).
    7. Hammami Algia & Bouri Abdelfatteh, 2016. "The Volatility of Oil Prices: What Factors?," Bulletin of Energy Economics (BEE), The Economics and Social Development Organization (TESDO), vol. 4(1), pages 98-110, March.
    8. Shalini, Velappan & Prasanna, Krishna, 2016. "Impact of the financial crisis on Indian commodity markets: Structural breaks and volatility dynamics," Energy Economics, Elsevier, vol. 53(C), pages 40-57.
    9. Ojogho, Osaihiomwan & Egware, Robert Awotu, 4. "Price Generating Process And Volatility In Nigerian Agricultural Commodities Market," International Journal of Food and Agricultural Economics (IJFAEC), Alanya Alaaddin Keykubat University, Department of Economics and Finance, vol. 3(4).
    10. repec:kap:revdev:v:20:y:2017:i:2:d:10.1007_s11147-016-9126-y is not listed on IDEAS
    11. Chen, Wang & Hamori, Shigeyuki & Kinkyo, Takuji, 2014. "Macroeconomic impacts of oil prices and underlying financial shocks," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 1-12.

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