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Financialisation of the commodity markets. Conclusions from the VARX DCC GARCH

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  • Karol Szafranek

Abstract

The global economy is highly dependent on commodity prices, which are, by and large, the outcome of market-specific supply and demand fundamentals. As a result, driven by different determinants, financial assets and commodity prices should be negligibly correlated. However, systematically growing engagement of noncommercial investors equipped with financial engineering innovations on commodity markets, generous inflow of capital resulting from the necessity for wider diversification of investment portfolios combined with the strengthening influence of purely financial and speculative motives have led in the 2000’s to a much stronger correlation between the financial and commodity markets, sparking a heated debate on the commodity markets financialisation. The empirical analysis presented here supports the claim that since 2005 commodity markets have been under heavier influence of macroeconomic, financial and speculative determinants. However, the process loses on strength since 2011. Results of the Varx Dcc Garch model with leverage effect and multivariate t error distribution demonstrate that the inclusion of the commodity markets’ growing sensitivity to macroeconomic conditions, financial markets turmoil and the impact of speculative aspects alters the dynamic conditional correlation path between commodities and the financial markets from 2005 to 2011 signaling the process of financialisation. Additional conclusions are drawn regarding the stability of the market interdependence as well as the parameter estimates.

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  • Karol Szafranek, 2015. "Financialisation of the commodity markets. Conclusions from the VARX DCC GARCH," NBP Working Papers 213, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:213
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    Cited by:

    1. Sania Wadud & Robert D. Durand & Marc Gronwald, 2021. "Connectedness between the Crude Oil Futures and Equity Markets during the Pre- and Post-Financialisation Eras," CESifo Working Paper Series 9202, CESifo.

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    More about this item

    Keywords

    Icommodity markets; financialisation; Varx; Dcc; price dynamics determinants;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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