The Growing Interdependence Between Financial And Commodity Markets

Financial investment has become increasingly important on commodity exchanges. This paper distinguishes two types of financial investors and emphasizes differences in their position taking motivation and price impacts. Index traders follow a passive strategy holding virtually only long positions. Money managers trade on both sides of the market and attempt to maximize short-term returns. Regression analysis indicates that: (i) index trader positions are particularly influenced by roll returns, while money managers emphasize spot returns; and that: (ii) money managers moved from emphasizing diversification to a more speculative strategy by taking commodity positions that are positively, rather than negatively, related to developments in equity markets. Granger-causality tests indicate that these differences translate into different price impacts: (i) index trader positions have a causal price impact particularly for agricultural commodities; and (ii) money managers had a causal impact during the sharp increases in the prices for some non-agricultural commodities.