Does 'Paper Oil' Matter? Energy Markets’ Financialization and Equity-Commodity Co-Movements
49 Pages Posted: 30 May 2011 Last revised: 25 Feb 2022
Date Written: December 30, 2021
Abstract
We document new facts regarding the financialization of U.S. energy futures markets between 2000 and 2010. We use this information to show that, after controlling for macroeconomic and energy-market fundamentals, co-movements between energy and stock markets increase significantly amid greater energy paper-market activity by hedge funds—especially funds that are active in both equity and energy markets. The connection to hedge fund activity weakens at time of financial market stress. We find, in contrast, no link between the strength of energy-equity market return correlations and the positions of commodity index traders. Our results have implications for the ongoing debate about the financialization of commodity markets.
Keywords: Financialization, Energy-equity return correlations, Market co-movements, DCC
JEL Classification: Q40, Q43, G10, G12, G13, G23
Suggested Citation: Suggested Citation
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