Diversification and Financialization in Commodity Markets: Evidence from Commodity Trading Advisors

55 Pages Posted: 2 Jan 2019

See all articles by Yong Chen

Yong Chen

Texas A&M University - Department of Finance

Wenting Dai

Texas A&M University - Mays Business School

Sorin M. Sorescu

Texas A&M University - Department of Finance

Date Written: December 5, 2018

Abstract

We examine commodity trading advisors (CTAs) to further understand the causes and consequences of the financialization of commodity markets. We find that CTAs can hedge against stock market downturns and investor flows chase CTAs with better hedging properties. However, CTAs' size is positively associated with their return comovement with stocks, implying a decline in diversification benefits during commodity financialization. Using the September 11 attacks as an exogenous shock to hedging demand, we present causal evidence that hedging-motivated capital inflows to commodities increase the commodity-stock comovement. Overall, our findings highlight the link between dynamics of diversification benefits and commodity financialization.

Keywords: commodity futures, financialization, commodity trading advisor, diversification, asset allocation

JEL Classification: G11, G13, G14, G23

Suggested Citation

Chen, Yong and Dai, Wenting and Sorescu, Sorin M., Diversification and Financialization in Commodity Markets: Evidence from Commodity Trading Advisors (December 5, 2018). Available at SSRN: https://ssrn.com/abstract=3287568 or http://dx.doi.org/10.2139/ssrn.3287568

Yong Chen (Contact Author)

Texas A&M University - Department of Finance ( email )

360 Wehner Building
College Station, TX 77843-4218
United States

Wenting Dai

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Sorin M. Sorescu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

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