A Hiding Place? Diversification, Financialization, and Return Comovement in Commodity Markets
46 Pages Posted: 2 Jan 2019 Last revised: 18 Mar 2022
Date Written: July 19, 2021
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: Suggested Citation