Approaches to Price Formation in Financialised Commodity Markets

A recent debate over the financialisation of commodity markets has stimulated the development of approaches to price formation which incorporate index traders as a new trader category in commodity futures markets. I survey these new approaches by retracing their emergence to traditional price formation models and show that these new models arise from a synthesis between commodity arbitrage pricing and asset pricing theories in the tradition of Keynesian inspired hedging pressure models. Based on these insights, I derive testable hypotheses to provide guidance for a growing literature that seeks to empirically evaluate the effects of index traders on price discovery and risk management in commodity futures markets.