Abstract

http://ssrn.com/abstract=2201600
 
 

References (43)



 
 

Footnotes (19)



 


 



A Model of Financialization of Commodities


Suleyman Basak


London Business School; Centre for Economic Policy Research (CEPR)

Anna Pavlova


London Business School; Centre for Economic Policy Research (CEPR)

May 10, 2013


Abstract:     
A sharp increase in the popularity of commodity investing in the past decade has triggered an unprecedented inflow of institutional funds into commodity futures markets. Such financialization of commodities coincided with significant booms and busts in commodity markets, raising concerns of policymakers. In this paper, we explore the effects of financialization in a model that features institutional investors alongside traditional futures markets participants. The institutional investors care about their performance relative to a commodity index. We find that if a commodity futures is included in the index, supply and demand shocks specific to that commodity spill over to all other commodity futures markets. In contrast, supply and demand shocks to a nonindex commodity affect just that commodity market alone. Moreover, prices and volatilities of all commodity futures go up, but more so for the index futures than for nonindex ones. Furthermore, financialization — the presence of institutional investors — leads to an increase in correlations amongst commodity futures as well as in equity-commodity correlations. Consistent with empirical evidence, the increases in the correlations between index commodities exceed those for nonindex ones. We model explicitly demand shocks which allows us to disentangle the effects of financialization from the effects of demand and supply (fundamentals). We perform a simple calibration and find that financialization accounts for 11% to 17% of commodity futures prices and the rest is attributable to fundamentals.

Number of Pages in PDF File: 48

Keywords: asset pricing, indexing, commodities, futures, institutions, money management, asset class

JEL Classification: G12, G18, G29

working papers series


Download This Paper

Date posted: January 18, 2013 ; Last revised: May 10, 2013

Suggested Citation

Basak, Suleyman and Pavlova, Anna, A Model of Financialization of Commodities (May 10, 2013). Available at SSRN: http://ssrn.com/abstract=2201600 or http://dx.doi.org/10.2139/ssrn.2201600

Contact Information

Suleyman Basak
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
44 (0)20 7000 8256 (Phone)
44 (0)20 7000 8201 (Fax)
HOME PAGE: http://faculty.london.edu/sbasak/
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Anna Pavlova (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
+44 20 7000 8218 (Phone)
HOME PAGE: http://faculty.london.edu/apavlova
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Feedback to SSRN


Paper statistics
Abstract Views: 1,385
Downloads: 438
Download Rank: 34,500
References:  43
Footnotes:  19

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.312 seconds