Index Investment and Financialization of Commodities

51 Pages Posted: 27 Sep 2010 Last revised: 17 Oct 2010

See all articles by Ke Tang

Ke Tang

Hanqing Advanced Institute of Economics and Finance

Wei Xiong

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2010

Abstract

This paper finds that, concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJ-UBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008. In contrast, such commodity price comovements were absent in China, which refutes growing commodity demands from emerging economies as the driver.

Suggested Citation

Tang, Ke and Xiong, Wei, Index Investment and Financialization of Commodities (September 2010). NBER Working Paper No. w16385. Available at SSRN: https://ssrn.com/abstract=1683135

Ke Tang (Contact Author)

Hanqing Advanced Institute of Economics and Finance ( email )

Room B906
Xianjin Building
Beijing, Beijing 100872
China

Wei Xiong

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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