New Evidence on the Financialization of Commodity Markets

Abstract:     
Following the recent, dramatic increase in commodity investments by financial institutions, academics, practitioners, and regulators have engaged in a heated debate over whether financial investors’ trades and holdings have affected commodity prices and their return dynamics. This paper examines the price impact of “financial” commodity investments on the commodities futures markets using a novel dataset of Commodity-Linked Notes (CLNs). The investor flows into CLNs are passed through to the futures markets by the hedging trades executed by CLN issuers. These hedging trades, which reflect the demands of the CLN investors, are plausibly exogenous to the contemporaneous and subsequent price movements, allowing us to identify the price impact of the hedging trades. We find that the investor flows cause significant price changes in the underlying futures markets, and therefore provide direct evidence of the impact of “financial” investment on commodity futures prices.

Number of Pages in PDF File: 51

Keywords: financialization, commodity-linked notes, commodity structured products, commodity index investors, commodity futures

JEL Classification: G13, G14, G18

working papers series