Working Paper: NBER ID: w19642
Authors: Inghaw Cheng; Wei Xiong
Abstract: The large inflow of investment capital to commodity futures markets in the last decade has generated a heated debate about whether financialization distorts commodity prices. Rather than focusing on the opposing views concerning whether investment flows either did or did not cause a price bubble, we critically review academic studies through the perspective of how financial investors affect risk sharing and information discovery in commodity markets. We argue that financialization has substantially changed commodity markets through these mechanisms.
Keywords: No keywords provided
JEL Codes: G00; Q02; Q1; Q4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financialization (G19) | Risk Sharing Dynamics (D16) |
| Financialization (G19) | Hedging Pressure Reduction (D61) |
| Hedging Pressure Reduction (D61) | Improved Risk Sharing (G52) |
| Time-Varying Risk Appetites of Financial Investors (G40) | Instability in Risk Sharing (D52) |
| Instability in Risk Sharing (D52) | Transmission of Shocks to Commodity Prices (G13) |
| Financialization (G19) | Information Discovery (D83) |
| Information Discovery (D83) | Drift in Futures Prices (G13) |
| Noise from Financial Trading (C58) | Misleading Price Signals for Final-Goods Producers (L11) |