The effects of commodity financialization on commodity market volatility

Ding, Shusheng; Cui, Tianxiang; Zheng, Dandan; Du, Min

Abstract

The last two decades have witnessed a massive capital inflow into commodity markets, provoking the commodity financialization episode, which turned into a major stimulus for emerging studies of commodity market prices as financialization can impact on commodity prices. In this paper, we analyze the price movements in commodity markets like oil market from commodity financialization perspective. Following this vein, we demonstrate that commodity financialization has a vast impact on commodity markets' volatility as well as dynamic correlations with stock market. We employ the DCC-GARCH model to demonstrate that commodity financialization increase the commodity market fluctuations and more importantly create a closer relation between commodity market and stock market. We further reveal that there is an asymmetrical capital attracting mechanism across different commodity markets and thus different markets may exhibit different weight in affecting conditional volatilities and dynamic conditional correlations with stock market after commodity financialization. We show that gold, sugar and wheat markets play dominate roles in affecting market volatilities as well as correlations with stock market, where their liquidities have spillover effects on other commodity markets’ conditional volatilities and dynamic conditional correlations with the stock market. Our sub-sample results illustrate considerably liquidity impacts on market volatility and correlation with stock market after financialization, for gold, sugar and wheat markets, which largely differentiate from the pre-financialization period.

Citation

Ding, S., Cui, T., Zheng, D., & Du, M. (2021). The effects of commodity financialization on commodity market volatility. Resources Policy, 73, https://doi.org/10.1016/j.resourpol.2021.102220

• Journal Article Type: Article
• Acceptance Date: Jun 28, 2021
• Online Publication Date: Jul 8, 2021
• Publication Date: 2021-10
• Deposit Date: Dec 10, 2021
• Journal: Resources Policy
• Print ISSN: 0301-4207
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 73
• Article Number: 102220
• DOI: https://doi.org/10.1016/j.resourpol.2021.102220
• Keywords: Commodity futures markets, Financialization of commodities, Conditional volatility, Dynamic conditional correlation
• Public URL: http://researchrepository.napier.ac.uk/Output/2828564