Commodity Financialization and Herd Behavior in Commodity Futures Markets

Abstract

This paper contributes to the debate on commodity financialization by extending tests of herd behavior to the commodity futures markets. Utilizing a regime-switching model, we test the presence of herd behavior in a number of commodity sectors; including energy, metals, grains, and livestock; during the low and high market volatility states. We find significant evidence of herd behavior in grains only during the high volatility state. We also find that large price movements in the energy and metals sectors significantly contribute to herd behavior in the market for grains. Finally, we find no significant effect of the stock market on herd behavior in the commodity futures markets. Our findings in general do not support the much debated commodity financialization hypothesis.

Keywords: herd behavior, commodity financialization, return dispersion, Markov Switching

JEL Classification: G14, G15