Commodities as Collateral
Forthcoming, Review of Financial Studies
54 Pages Posted: 17 Nov 2013 Last revised: 19 Apr 2016
Date Written: April 18, 2016
We propose and test a theory of using commodities as collateral for financing. Under capital control and collateral constraint, investors import commodities and pledge them as collateral to earn higher expected returns. Higher collateral demands increase commodity prices and make the inventory -- convenience yield relation less negative. Our model illustrates these equilibrium effects and suggests that the violation of covered interest-rate parity is a proxy for collateral demands. Evidence from eight commodities in China and developed markets supports the theoretical predictions. Our findings complement the theory of storage and provide new insights into the financialization of commodity markets.
Keywords: commodity, collateral, financialization, theory of storage, capital control
JEL Classification: G12, Q02
Suggested Citation: Suggested Citation