IDEAS home Printed from https://ideas.repec.org/p/zbw/oefsew/44.html
   My bibliography  Save this paper

Financialisation and the microstructure of commodity markets: A qualitative investigation of trading strategies of financial investors and commercial traders

Author

Listed:
  • Heumesser, Christine
  • Staritz, Cornelia

Abstract

The financialisation of commodity derivative markets, reflected in the increased presence of financial investors, and its effects on commodity prices and the fundamental roles of these markets, i.e. price discovery and price risk management for commercial traders, have been controversially discussed. This working paper provides an analysis of the microstructure of commodity derivative markets with a focus on the commodities coffee, cotton, wheat and aluminium. Two questions are in the center: firstly, how, in the context of financialisation, have the composition of traders and their trading strategies changed, and, secondly, how have the increasing presence and trading strategies of financial investors affected commercial traders, price discovery and hedging. The analysis builds on interviews with different types of market participants and relevant stakeholders. The paper finds that the increasing and often dominating role of financial investors has changed the microstructure of commodity derivative markets in terms of trading volumes and open interest positions, market participants, investment products and strategies, speed and complexity. The common classification of traders put forward by the US Commodity Trading Futures Commission seems to abstract too much from the reality in commodity markets given the multiple and interrelated roles of traders.Financial investors may have multiple roles, which include physical trading, and large commercial traders such as multinational trading houses typically pursue hedging and speculative trading strategies. Though financial investors are widely believed to increase the likelihood of excessive short term price fluctuations and commercial traders take into account their presence and strategies in their own trading behavior, they impact commercial traders in different ways. Large commercial traders seem not to be concerned about their increasing role or even perceive their presence as advantageous. But smaller commercial traders that do not have the resources and capacity to interact actively with derivative markets seem to find it more difficult to use markets for hedging given the increased complexity, speed and short-terminism and related higher risks and costs.

Suggested Citation

  • Heumesser, Christine & Staritz, Cornelia, 2013. "Financialisation and the microstructure of commodity markets: A qualitative investigation of trading strategies of financial investors and commercial traders," Working Papers 44, Austrian Foundation for Development Research (ÖFSE).
    • Handle: RePEc:zbw:oefsew:44
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/98809/1/774882786.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Brooks, Chris & Prokopczuk, Marcel & Wu, Yingying, 2013. "Commodity futures prices: More evidence on forecast power, risk premia and the theory of storage," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(1), pages 73-85.
    2. Brunetti, Celso & Reiffen, David, 2014. "Commodity index trading and hedging costs," Journal of Financial Markets, Elsevier, vol. 21(C), pages 153-180.
    3. Bicchetti, David & Maystre, Nicolas Maystre, 2013. "The synchronized and long-lasting structural change on commodity markets: Evidence from high frequency data," Algorithmic Finance, IOS Press, vol. 2(3-4), pages 233-239.
    4. Nicole M. Aulerich & Scott H. Irwin & Philip Garcia, 2013. "Returns to individual traders in agricultural futures markets: skill or luck?," Applied Economics, Taylor & Francis Journals, vol. 45(25), pages 3650-3666, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Küblböck, Karin & Staritz, Cornelia, 2014. "Regulation of commodity derivative markets: Critical assessment of reforms in the EU," Policy Notes 12/2014, Austrian Foundation for Development Research (ÖFSE).
    2. Staritz, Cornelia & Tröster, Bernhard & Küblböck, Karin, 2015. "Managing commodity price risks: The cases of cotton in Burkina Faso and Mozambique and coffee in Ethiopia," Policy Notes 16/2015, Austrian Foundation for Development Research (ÖFSE).
    3. Antonio Pedro & Elias T. Ayuk & Christina Bodouroglou & Ben Milligan & Paul Ekins & Bruno Oberle, 2017. "Towards a sustainable development licence to operate for the extractive sector," Mineral Economics, Springer;Raw Materials Group (RMG);Luleå University of Technology, vol. 30(2), pages 153-165, July.
    4. Staritz, Cornelia & Küblböck, Karin, 2013. "Re-regulation of commodity derivative markets: Critical assessment of current reform proposals in the EU and the US," Working Papers 45, Austrian Foundation for Development Research (ÖFSE).
    5. Staritz, Cornelia & Newman, Susan & Tröster, Bernhard & Plank, Leonhard, 2015. "Financialization, price risks, and global commodity chains: Distributional implications on cotton sectors in Sub-Saharan Africa," Working Papers 55, Austrian Foundation for Development Research (ÖFSE).
    6. Anseeuw, Ward & Roda, Jean-Marc & Ducastel, Antoine & Kamaruddin, Norfaryanti, 2016. "Stratégies globales des firmes et financiarisation de l’agriculture," Selected Book Chapters, in: Estelle Biénabe & Denis Loeillet & Alain Rival (ed.), Développement durable et filières tropicales. Estelle Biénabe, Denis Loeillet, Alian Rival (eds). (2016). Quae, Versailles, France. 336 pp. ISBN 97827, edition 1, volume 1, chapter 24, pages 265-279, CIRAD, Forest department, UPR40.
    7. Staritz, Cornelia & Heumesser, Christine & Küblböck, Karin, 2013. "Commodity prices, financial markets, and development: Effects of the financialisation of commodity markets and necessary policy reforms," Policy Notes 09/2013, Austrian Foundation for Development Research (ÖFSE).
    8. Cornelia Staritz & Susan Newman & Bernhard Tröster & Leonhard Plank, 2015. "Financialisation, price risks, and global commodity chains: Distributional implications on Cotton Sectors in Sub-Saharan Africa," Working Papers 2015/04, Maastricht School of Management.
    9. Staritz, Cornelia & Tröster, Bernhard, 2015. "Cotton-based development in Sub-Saharan Africa? Global commodity chains, national market structure and development outcomes in Burkina Faso, Mozambique and Tanzania," Working Papers 54, Austrian Foundation for Development Research (ÖFSE).
    10. Bierbaumer, Daniel & Rieth, Malte & Velinov, Anton, 2021. "The state-dependent trading behavior of banks in the oil futures market," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 1011-1024.
    11. Daniel Bierbaumer & Malte Rieth & Anton Velinov, 2018. "Nonlinear Intermediary Pricing in the Oil Futures Market," Discussion Papers of DIW Berlin 1722, DIW Berlin, German Institute for Economic Research.
    12. Michael Hachula & Malte Rieth, 2017. "Identifying Speculative Demand Shocks in Commodity Futures Markets through Changes in Volatility," Discussion Papers of DIW Berlin 1646, DIW Berlin, German Institute for Economic Research.
    13. Tröster, Bernhard & Staritz, Cornelia & Grumiller, Jan & Maile, Felix, 2019. "Commodity dependence, global commodity chains, price volatility and financialisation: Price-setting and stabilisation in the cocoa sectors in Côte d'Ivoire and Ghana," Working Papers 62, Austrian Foundation for Development Research (ÖFSE).
    14. Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) (ed.), 2015. "Österreichische Entwicklungspolitik 2015. Rohstoffe und Entwicklung," Austrian Development Policy Report, Austrian Foundation for Development Research (ÖFSE), number 268194.
    15. Cornelia Staritz & Susan Newman & Bernhard Tröster & Leonhard Plank, 2018. "Financialization and Global Commodity Chains: Distributional Implications for Cotton in Sub†Saharan Africa," Development and Change, International Institute of Social Studies, vol. 49(3), pages 815-842, May.
    16. Tröster, Bernhard, 2015. "Global commodity chains, financial markets, and local market structures: Price risks in the coffee sector in Ethiopia," Working Papers 56, Austrian Foundation for Development Research (ÖFSE).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Nicole M. Moran & Scott H. Irwin & Philip Garcia, 2020. "Who Wins and Who Loses? Trader Returns and Risk Premiums in Agricultural Futures Markets," Applied Economic Perspectives and Policy, John Wiley & Sons, vol. 42(4), pages 611-652, December.
    2. Domenica Tropeano, 2016. "Hedging, Arbitrage, and the Financialization of Commodities Markets," International Journal of Political Economy, Taylor & Francis Journals, vol. 45(3), pages 241-256, July.
    3. Ederer, Stefan & Heumesser, Christine & Staritz, Cornelia, 2013. "The role of fundamentals and financialisation in recent commodity price developments: An empirical analysis for wheat, coffee, cotton, and oil," Working Papers 42, Austrian Foundation for Development Research (ÖFSE).
    4. Jilong Chen & Christian Ewald & Ruolan Ouyang & Sjur Westgaard & Xiaoxia Xiao, 2022. "Pricing commodity futures and determining risk premia in a three factor model with stochastic volatility: the case of Brent crude oil," Annals of Operations Research, Springer, vol. 313(1), pages 29-46, June.
    5. Büyükşahin, Bahattin & Robe, Michel A., 2014. "Speculators, commodities and cross-market linkages," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 38-70.
    6. Julien Chevallier & Florian Ielpo, 2013. "Volatility spillovers in commodity markets," Applied Economics Letters, Taylor & Francis Journals, vol. 20(13), pages 1211-1227, September.
    7. Sophie van Huellen, 2020. "Approaches To Price Formation In Financialized Commodity Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 34(1), pages 219-237, February.
    8. Steffen Volkenand & Günther Filler & Martin Odening, 2020. "Price Discovery and Market Reflexivity in Agricultural Futures Contracts with Different Maturities," Risks, MDPI, vol. 8(3), pages 1-17, July.
    9. Zaremba, Adam, 2015. "Inflation, Business Cycles, and Commodity Investing in Financialized Markets," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 6(1), pages 1-18, January.
    10. James D. Hamilton & Jing Cynthia Wu, 2015. "Effects Of Index‐Fund Investing On Commodity Futures Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(1), pages 187-205, February.
    11. Li, Ziran, 2017. "Three essays on commodity markets," ISU General Staff Papers 201701010800006361, Iowa State University, Department of Economics.
    12. Zaremba, Adam, 2016. "Strategies Based on Momentum and Term Structure in Financialized Commodity Markets," Business and Economics Research Journal, Uludag University, Faculty of Economics and Administrative Sciences, vol. 7(1), pages 31-46, January.
    13. Borgards, Oliver & Czudaj, Robert L. & Hoang, Thi Hong Van, 2021. "Price overreactions in the commodity futures market: An intraday analysis of the Covid-19 pandemic impact," Resources Policy, Elsevier, vol. 71(C).
    14. van Huellen, Sophie, 2019. "Price discovery in commodity futures and cash markets with heterogeneous agents," Journal of International Money and Finance, Elsevier, vol. 95(C), pages 1-13.
    15. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., 2018. "Mapping algorithms, agricultural futures, and the relationship between commodity investment flows and crude oil futures prices," Energy Economics, Elsevier, vol. 72(C), pages 486-504.
    16. Boyd, Naomi E. & Harris, Jeffrey H. & Li, Bingxin, 2018. "An update on speculation and financialization in commodity markets," Journal of Commodity Markets, Elsevier, vol. 10(C), pages 91-104.
    17. Lang, Korbinian & Auer, Benjamin R., 2020. "The economic and financial properties of crude oil: A review," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    18. Filimonov, Vladimir & Bicchetti, David & Maystre, Nicolas & Sornette, Didier, 2014. "Quantification of the high level of endogeneity and of structural regime shifts in commodity markets," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 174-192.
    19. Yan, Lei & Irwin, Scott H. & Sanders, Dwight R., 2017. "Identifying the Impact of Financialization in Commodity Futures Prices from Index Rebalancing," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258504, Agricultural and Applied Economics Association.
    20. Nicole M. Aulerich & Scott H. Irwin & Philip Garcia, 2014. "Bubbles, Food Prices, and Speculation: Evidence from the CFTC's Daily Large Trader Data Files," NBER Chapters, in: The Economics of Food Price Volatility, pages 211-253, National Bureau of Economic Research, Inc.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:oefsew:44. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/ofsewat.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.