Liquidity Shocks, Commodity Financialization, and Market Comovements

Journal of Futures Markets, Forthcoming

39 Pages Posted: 16 Jun 2020

See all articles by Conghui Hu

Conghui Hu

Beijing Normal University, Business School

Zhibing Li

University of International Business and Economics (UIBE)

Xiaoyu Liu

Tsinghua University

Date Written: May 22, 2020

Abstract

We explore whether and how liquidity factors influence risk transfers between commodity and stock markets using a composite liquidity index and five different types of liquidity measures. We find that liquidity shocks, including both funding liquidity and market liquidity, are positively associated with comovements between commodity and stock markets after 2000, though the relationship is insignificant prior to 2000. The structural change indicates that financialization creates a role for adverse liquidity shocks to increase cross-market correlations. Further evidence shows that the effect of liquidity on cross-market correlations is state-dependent and intensifies when liquidity conditions deteriorate and asset returns sustain substantial declines. Our findings are not explained by business cycles.

Keywords: Financialization, Liquidity Shocks, Commodity Markets, Stock Markets, Comovement

JEL Classification: F30, G15, G13

Suggested Citation

Hu, Conghui and Li, Zhibing and Liu, Xiaoyu, Liquidity Shocks, Commodity Financialization, and Market Comovements (May 22, 2020). Journal of Futures Markets, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3607794

Conghui Hu (Contact Author)

Beijing Normal University, Business School ( email )

19 Xinjiekou Outer St
Haidian District
Beijing, Beijing 100875
China

Zhibing Li

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

Xiaoyu Liu

Tsinghua University ( email )

Beijing, 100084
China

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