Comovement, Index Investing and the Financialization of Commodities
33 Pages Posted: 5 Mar 2015 Last revised: 2 Feb 2018
Date Written: January 31, 2018
Over the last two decades, commodity indices have been increasingly used to achieve investment portfolio diversification. At the same time, the rise in the popularity of these indices has prompted questions on whether commodities remained segmented from traditional financial asset markets, which can affect diversification decisions. Using futures data from 1998 to 2017 for 25 US-traded commodities, we find a statistically significant increase in comovement among non-energy index-commodities. This increase is only temporary. In contrast, no change in comovement is observed for off-index commodities over the entire period. Off-commodities, in other words, are the only one remaining segmented. Our results are robust to alternative explanations – non-trading effects and common supply characteristics. The analysis of high-frequency returns dynamics reinforces the results. Such comovement ‘index effect’ is in line with the predictions of theoretical models of the financialization of commodity markets and consistent with the role of style investing.
Keywords: Comovement; Commodity financialization; Indexing; Style effect; Realized Beta
JEL Classification: G01, G12, Q02
Suggested Citation: Suggested Citation