Working Paper: NBER ID: w16385
Abstract: This paper finds that, concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJ-UBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008. In contrast, such commodity price comovements were absent in China, which refutes growing commodity demands from emerging economies as the driver.
Keywords: Index Investment; Financialization; Commodities; Price Comovements; Volatility
JEL Codes: G1; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Index investment (G12) | Increased return correlations among indexed commodities (Q02) |
| Index investment (G12) | Greater price comovements among indexed commodities (G13) |
| Financialization process (G19) | Increased volatility of indexed commodities (G13) |
| Financial crisis of 2008 (G01) | Intensified correlations among indexed commodities (Q02) |
| Index investment (G12) | Commodities behaving more like financial assets (G13) |
| Presence of index investors (G23) | Greater correlation among commodities (Q02) |