Have Commodities Become a Financial Asset? Evidence from Ten Years of Financialization
39 Pages Posted: 12 Jul 2017 Last revised: 24 May 2018
Date Written: May 2018
The financialization of commodity markets over the last decade has changed the behavior of commodity prices in fundamental ways. In this paper, we uncover the gradual transformation of commodities from a physical to a financial asset. Although economic demand and supply factors continue to play an important role, recent indicators associated with financialization have emerged since 2008. We show that financial variables have become the main driving factors explaining the variation in commodity returns and volatility today. Our findings have important implications for portfolio analysis and for the effectiveness of hedging in commodity markets.
Keywords: Crude Oil, Financialization, R-Squared Decomposition
JEL Classification: Q40, Q41, G14
Suggested Citation: Suggested Citation