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Financialization in Commodity Markets

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  • V. V. Chari
  • Lawrence J. Christiano

Abstract

The ?nancialization view is that increased trading in commodity futures markets is associated with increases in the growth rate and volatility of commodity spot prices. This view gained credence be-cause in the 2000s trading volume increased sharply and many commodity prices rose and became more volatile. Using a large panel dataset we constructed, which includes commodities with and with-out futures markets, we ?nd no empirical link between increased futures market trading and changes in price behavior. Our data sheds light on the economic role of futures markets. The conventional view is that futures markets provide one-way insurance by allowing outsiders, traders with no direct interest in a commodity, to insure insiders, traders with a direct interest. The data are not consistent with the conventional view and we argue that they point to an alternative mutual insurance view, in which all participants insure each other. We formalize this view in a model and show that it is consistent with key features of the data.

Suggested Citation

  • V. V. Chari & Lawrence J. Christiano, 2017. "Financialization in Commodity Markets," Staff Report 552, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:552
    DOI: 10.21034/sr.552
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    1. Irwin, Scott H. & Sanders, Dwight R., 2012. "Financialization and Structural Change in Commodity Futures Markets," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 44(3), pages 371-396, August.
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    6. Irwin, Scott H. & Sanders, Dwight R. & Merrin, Robert P., 2009. "Devil or Angel? The Role of Speculation in the Recent Commodity Price Boom (and Bust)," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 41(2), August.
    7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    8. V. V. Chari & Ravi Jagannathan & Larry Jones, 1990. "Price Stability and Futures Trading in Commodities," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 527-534.
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    Citations

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    Cited by:

    1. Boubakri, Salem & Guillaumin, Cyriac & Silanine, Alexandre, 2019. "Non-linear relationship between real commodity price volatility and real effective exchange rate: The case of commodity-exporting countries," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 212-228.
    2. Jorge Lorca, 2021. "Capital Flows and Emerging Markets Fluctuations," Working Papers Central Bank of Chile 898, Central Bank of Chile.
    3. Alonso-Alvarez, Irma & Di Nino, Virginia & Venditti, Fabrizio, 2022. "Strategic interactions and price dynamics in the global oil market," Energy Economics, Elsevier, vol. 107(C).
    4. Clio Ciaschini & Kateryna Tkach & Francesca Mariani & Maria Cristina Recchioni, 2019. "Speculative bubbles in agricultural commodity prices: detection and forecasting via market indicators," RIEDS - Rivista Italiana di Economia, Demografia e Statistica - The Italian Journal of Economic, Demographic and Statistical Studies, SIEDS Societa' Italiana di Economia Demografia e Statistica, vol. 73(2), pages 63-73, April-Jun.
    5. Takuji Fueki & Jouchi Nakajima & Shinsuke Ohyama & Yoichiro Tamanyu, 2021. "Identifying oil price shocks and their consequences: The role of expectations in the crude oil market," International Finance, Wiley Blackwell, vol. 24(1), pages 53-76, April.
    6. Don Bredin & Valerio Potì & Enrique Salvador, 2022. "Food Prices, Ethics and Forms of Speculation," Journal of Business Ethics, Springer, vol. 179(2), pages 495-509, August.
    7. Cyriac Guillaumin & Salem Boubakri & Alexandre Silanine, 2020. "Do commodity price volatilities impact currency misalignments in commodity-exporting countries?," Economics Bulletin, AccessEcon, vol. 40(2), pages 1727-1739.
    8. Siklos, Pierre L., 2021. "The macroeconomic response to real and financial factors, commodity prices, and monetary policy: International evidence," Economic Systems, Elsevier, vol. 45(1).
    9. Chincarini, Ludwig B. & Moneta, Fabio, 2021. "The challenges of oil investing: Contango and the financialization of commodities," Energy Economics, Elsevier, vol. 102(C).
    10. Gent Bajraj & Andrés Fernández & Miguel Fuentes & Benjamín García & Jorge Lorca & Manuel Paillacar & Juan Marcos Wlasiuk, 2022. "Global Drivers and Macroeconomic Volatility in EMEs: a Dynamic Factor, General Equilibrium Perspective," Working Papers Central Bank of Chile 963, Central Bank of Chile.
    11. Marc Bohmann, 2020. "Price Discovery and Information Asymmetry in Equity and Commodity Futures Options Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2020.
    12. Tenreyro, Silvana & Drechsel, Thomas & McLeay, Michael, 2019. "Monetary policy for commodity booms and busts," CEPR Discussion Papers 14030, C.E.P.R. Discussion Papers.
    13. Ibhagui, Oyakhilome, 2021. "Stock market and deviations from covered interest parity," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    14. Christian Koziol & Tilo Treuter, 2019. "How do speculators in agricultural commodity markets impact production decisions and commodity prices? A theoretical analysis," European Financial Management, European Financial Management Association, vol. 25(3), pages 718-743, June.
    15. Sharma, Shahil & Rodriguez, Ivan, 2019. "The diminishing hedging role of crude oil: Evidence from time varying financialization," Journal of Multinational Financial Management, Elsevier, vol. 52.
    16. Husnu C. Dalgic, 2018. "Financial Dollarization in Emerging Markets: An Insurance Arrangement," CRC TR 224 Discussion Paper Series crctr224_051_2018, University of Bonn and University of Mannheim, Germany.

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    More about this item

    Keywords

    Futures market returns; Open interest; Net financial flows; Spot price volatility;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy

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