Working Paper: NBER ID: w23766
Authors: VV Chari; Lawrence Christiano
Abstract: Recent experience has given rise to the financialization view: increased trading in commodity futures markets leads to an increase in the level and volatility of spot prices. We construct a large panel data set which includes commodities with and without futures markets. The data do not support the financialization view. We also find that futures returns are positively correlated with open interest and not correlated with net financial flows. The facts on spot and futures prices and volume necessitate a new view, which we develop, of the economic role of futures markets. Our model is consistent with the key facts.
Keywords: No keywords provided
JEL Codes: E02; G12; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased open interest (G13) | futures returns (G17) |
| net financial flows (F32) | futures returns (G17) |
| trading in commodity futures markets (G13) | level and volatility of spot prices (E30) |