Diversification and Financialization in Commodity Markets: Evidence from Commodity Trading Advisors
55 Pages Posted: 2 Jan 2019
Date Written: December 5, 2018
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: Suggested Citation