Financialization in Commodity Markets

59 Pages Posted: 11 Sep 2017

See all articles by Varadarajan V. Chari

Varadarajan V. Chari

University of Minnesota - Twin Cities - Department of Economics; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Date Written: September 2017

Abstract

The financialization view is that increased trading in commodity futures markets is associated with increases in the growth rate and volatility of commodity spot prices. This view gained credence because in the 2000s trading volume increased sharply and many commodity prices rose and became more volatile. Using a large panel dataset we constructed, which includes commodities with and without futures markets, we find no empirical link between increased futures market trading and changes in price behavior. Our data sheds light on the economic role of futures markets. The conventional view is that futures markets provide one-way insurance by allowing outsiders, traders with no direct interest in a commodity, to insure insiders, traders with a direct interest. The data are not consistent with the conventional view and we argue that they point to an alternative mutual insurance view, in which all participants insure each other. We formalize this view in a model and show that it is consistent with key features of the data.

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Suggested Citation

Chari, Varadarajan V. and Christiano, Lawrence J., Financialization in Commodity Markets (September 2017). NBER Working Paper No. w23766. Available at SSRN: https://ssrn.com/abstract=3035121

Varadarajan V. Chari (Contact Author)

University of Minnesota - Twin Cities - Department of Economics ( email )

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1108 Management & Economics
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Federal Reserve Bank of Minneapolis ( email )

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National Bureau of Economic Research (NBER)

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Lawrence J. Christiano

Northwestern University ( email )

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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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