Abstract
This paper examines whether the proliferation of new index products, such as commodity-tracking exchange-traded funds (ETFs) amplified the volatility transmission channel introduced by financialization. This paper focuses on the volatility spillover effects among crude oil, metals, agriculture, and non-energy commodity markets. The results show financialization has an impact on the volatility of commodity prices, predominantly for non-energy commodities. However, the impact on volatility is not symmetric across all commodities. The analysis of index investment and investors’ positions in futures markets shows that when a relationship exists it is generally negatively correlated with the realized volatility of non-energy commodities. Using realized volatility in Tang and Xiong’s (2012) difference-in-difference model provides estimates that are inconsistent with the original findings that non-energy commodities traded as a part of indices have experienced higher volatility. The results are similar to the index investment and futures market analysis where increased participation by investors through new investment products has put download pressure on realized volatility.
Highlights
The rapid growth of index investment has greatly increased the ability for investors to access the commodity markets and, expedited the market integration of commodities
Coefficients c2004, c2006, c2007, c2009 to c2012, and c2015, are positive and significant, indicating that non-energy commodities that are traded as a part of the S&P Goldman Sachs Commodity Index (GSCI) have experienced larger volatility increases than did off-index commodities
The results show financialization has an impact on the volatility of commodity prices, predominantly for non-energy commodities
Summary
The rapid growth of index investment has greatly increased the ability for investors to access the commodity markets and, expedited the market integration of commodities. The large inflows of investment capital into commodity markets precipitated a process commonly referred as financialization. A conservative estimate shows that the commodity index traders more than quadrupled between 2000 and 2010 (Adams and Glück 2015). These new types of commodity index investors may lead to dramatic increase in commodity prices and market volatilities. Policy makers are concerned that the financialization of the commodity market may lead to unnecessary increase in the cost of food and energy (Masters 2008). Policy makers are concerned that the financialization of the commodity market may lead to unnecessary increase in the cost of food and energy (Masters 2008). Acharya et al (2013)
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