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Financialization and Commodity Markets Serial Dependence

79 Pages Posted: 6 Dec 2018 Last revised: 7 Jan 2022

See all articles by Zhi Da

Zhi Da

University of Notre Dame - Mendoza College of Business

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University

Yubo Tao

University of Macau - Department of Economics

Liyan Yang

University of Toronto - Rotman School of Management

Date Written: January 6, 2021

Abstract

Recent financialization in commodity markets makes it easier for institutional investors to trade a portfolio of commodities via various commodity-indexed products. We present novel causal evidence that exposure to such index trading results in negative daily return autocorrelations among commodities in that index. This is because index trading propagates non-fundamental noises to indexed commodities, giving rise to price overshoots and subsequent reversals. We present direct evidence for such noise propagation using commodity news sentiment data.

Keywords: Financialization, Return autocorrelation, Index trading, News sentiment, ETF arbitrage, Price discovery

JEL Classification: G12, G40, Q02

Suggested Citation

Da, Zhi and Tang, Ke and Tao, Yubo and Yang, Liyan, Financialization and Commodity Markets Serial Dependence (January 6, 2021). Available at SSRN: https://ssrn.com/abstract=3285541 or http://dx.doi.org/10.2139/ssrn.3285541

Zhi Da

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Ke Tang

Institute of Economics, School of Social Sciences, Tsinghua University ( email )

No.1 Tsinghua Garden
Beijing, 100084
China

Yubo Tao (Contact Author)

University of Macau - Department of Economics ( email )

University of Macau, E21B
Avenida da Universidade, Taipa, Macau, China
Macao, 999078
Macau

HOME PAGE: http://https://sites.google.com/site/ybtao1990/home

Liyan Yang

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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