Analyzing the Structural Transformation of Commodity Markets: Financialization Revisited

Abstract

The first decade of the 21st century saw wide fluctuations in commodity prices and a massively increased participation of financial investors in the commodity derivatives markets. The investigation of whether the presence of financial investors was responsible for these fluctuations - and, more in general, whether large trades affected futures and spot prices - has yielded mixed results in the literature. We take up this question by linking financialization to the ongoing structural transformation of the commodity markets. First, we discuss issues related to the identification of the price effects of financialization; then, we present models of commodity markets with heterogeneous agents and informational frictions and discuss the role of financial investors as the counterparts of commercial hedgers. Lastly, we suggest some avenues for future research, including the possible implications of the shale revolution and of commodity trading in the financialization process.