Commodities as Collateral

Forthcoming, Review of Financial Studies

54 Pages Posted: 17 Nov 2013 Last revised: 19 Apr 2016

See all articles by Ke Tang

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Haoxiang Zhu

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: April 18, 2016

Abstract

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

Tang, Ke and Zhu, Haoxiang, Commodities as Collateral (April 18, 2016). Forthcoming, Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=2355674 or http://dx.doi.org/10.2139/ssrn.2355674

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

Haoxiang Zhu (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street E62-623
Cambridge, MA 02142
United States

HOME PAGE: http://www.mit.edu/~zhuh

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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