Causes and Implications of Shifts in Financial Participation in Commodity Markets

44 Pages Posted: 17 Dec 2012 Last revised: 25 Mar 2013

See all articles by Bassam Fattouh

Bassam Fattouh

University of Oxford - Oxford Institute for Energy Studies

Lavan Mahadeva

Oxford Institute for Energy Studies

Date Written: February 13, 2013

Abstract

We assess the causes and implications of the greater financial participation in commodity markets post-2003. Focusing on crude oil, we build a calibrated macro-finance model of oil prices and quantities that also determines consumer welfare. We show that shifts in the preferences and constraints of financial speculators cannot explain the observed movement in the futures spread and so are unlikely to expose consumer welfare to shocks, even in the presence of belief disagreements. Shifts in the supply and demand for spot oil can better explain many of the features often attributed to financialization including financial participation itself.

Keywords: Commodities, Financialization, Macro-finance, Asset Pricing, Belief Disagreements

JEL Classification: C63, G12, G13, G17, Q43

Suggested Citation

Fattouh, Bassam and Mahadeva, Lavan, Causes and Implications of Shifts in Financial Participation in Commodity Markets (February 13, 2013). Available at SSRN: https://ssrn.com/abstract=2190085 or http://dx.doi.org/10.2139/ssrn.2190085

Bassam Fattouh

University of Oxford - Oxford Institute for Energy Studies ( email )

57 Woodstock Road
Oxford, OX2 6FA
United Kingdom

Lavan Mahadeva (Contact Author)

Oxford Institute for Energy Studies ( email )

57 Woodstock Road
Oxford, Oxfordshire OX2 6FA
United Kingdom

HOME PAGE: http://https://sites.google.com/site/lavanmahadeva/

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