A Hiding Place? Diversification, Financialization, and Return Comovement in Commodity Markets

46 Pages Posted: 2 Jan 2019 Last revised: 18 Mar 2022

See all articles by Yong Chen

Yong Chen

Texas A&M University - Department of Finance

Wenting Dai

Nankai University - School of Finance

Sorin M. Sorescu

Texas A&M University - Department of Finance

Date Written: July 19, 2021

Abstract

This paper provides new and integrated evidence on the causes and consequences of commodity financialization from the perspective of diversification. First, based on a large sample of commodity trading advisors, we find that financial investment in commodity markets is related to the diversification benefits against stock market downturns. Second, the aggregate financial investment positively predicts future commodity-stock return correlation. Finally, using terrorist attacks as shocks to diversification need, we present causal evidence that diversification-motivated investment in commodity markets increases the commodity-stock market comovement. Overall, our findings reveal the economic link between diversification benefits, commodity financialization, and the commodity-stock market comovement.

Keywords: Commodity financialization, diversification, investor flows, return comovement

JEL Classification: G11, G13, G14, G23

Suggested Citation

Chen, Yong and Dai, Wenting and Sorescu, Sorin M., A Hiding Place? Diversification, Financialization, and Return Comovement in Commodity Markets (July 19, 2021). 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

HOME PAGE: http://mays.tamu.edu/directory/ychen/

Wenting Dai

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

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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