Unconventional Monetary Policy and Financialization of Commodities
The North American Journal of Economics and Finance, Forthcoming
54 Pages Posted: 28 Aug 2019
Date Written: March 28, 2018
We examine whether volatility spillover between US equity and commodity markets has significantly changed with the heavy influx of index traders in commodity derivatives markets, which is a phenomenon referred to as financialization. Previous findings show that institutional traders enter commodity markets at high liquidity episodes. Given that quantitative easing episode was highly criticized for providing excessive liquidity to the market, we investigate the impact of US quantitative easing policy on spillover between commodity and US stocks. Our results indicate that during post-financialization period, spillover from stocks to commodities have significantly increased for almost all commodities. More importantly, we show that quantitative easing is one of the underlying reasons for increasing volatility spillover between markets. Including interest rate, currency factors or default spread does not diminish the explicit role of quantitative easing on spillovers.
Keywords: institutional traders, volatility spillover, financialization, stock markets, quantitative easing
JEL Classification: G01, G10, G12, G23
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