Comovement, Index Investing and the Financialization of Commodities

33 Pages Posted: 5 Mar 2015 Last revised: 2 Feb 2018

See all articles by Matteo Bonato

Matteo Bonato

University of Johannesburg - Department of Economics and Econometrics; Valdon Group GhmB

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment; University of Verona - Department of Economics

Date Written: January 31, 2018

Abstract

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

Bonato, Matteo and Taschini, Luca, Comovement, Index Investing and the Financialization of Commodities (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=2573551 or http://dx.doi.org/10.2139/ssrn.2573551

Matteo Bonato (Contact Author)

University of Johannesburg - Department of Economics and Econometrics ( email )

P.O. Box 524
Auckland Park 2006, Johannesburg
South Africa

Valdon Group GhmB ( email )

Zurich
Germany

Luca Taschini

London School of Economics & Political Science (LSE) - Grantham Research Institute on Climate Change and the Environment ( email )

Houghton Street
London, WC2A 2AE
Great Britain

University of Verona - Department of Economics ( email )

Via Cantarane 24
Verona, Verona 37129
Italy

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