Are Agriculture Markets Driven by Investors’ Allocation? Evidence from the Co-Movement of Commodity Prices
29 Pages Posted: 23 Dec 2016 Last revised: 14 Feb 2017
Date Written: February 14, 2017
We examine the effect of financial investments on the futures market of seventeen agriculture commodities during 2006-16. Introducing a financialization index we show that financial investors significantly affect the variation in the co-movement of these commodities. We find even stronger evidence that a higher relative share of commodity index traders increases the correlation between individual commodity prices. Our analysis indicates that in order to avoid financial interests affecting agriculture markets the relative share of commodity index traders’ long open interest should not be significantly higher than 28%. Changes in the intensity of financial speculation thus have a non-negligible influence on agriculture commodity markets.
Keywords: Agriculture-specific common factor; commodity index traders; futures market
JEL Classification: G13, Q10, Q14, Q18
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