Financialization of agricultural commodities: Evidence from China

Abstract

Speculation in the commodity futures market distorts commodity prices, driving them away from rational levels. This phenomenon, which is known as the financialization of commodities, has raised significant concerns in recent years. Particularly, in the agricultural market, ‘financialized’ commodities have been blamed for high world food prices. In this paper, we examine the financialization of agricultural commodities in China. To do so, a time-varying copula is employed to investigate the dependence structure between commodities and stock markets. Four insightful results are obtained. First, positive correlations between agricultural commodities and stock markets demonstrate the financialization of agricultural commodities. Second, the identified correlations are time-varying and idiosyncratic with respect to products. Third, the agricultural commodity market is more closely correlated with the domestic stock market than with the overseas market. Fourth, a growing dependence between commodities and the stock markets is detected and the co-movement became stronger after the global financial crisis.