The effects of commodity financialization on commodity market volatility

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

Abstract

Over the last two decades, it has been witnessed that massive capital flooded into commodity markets, provoking the commodity financialization episode, which turned into a major stimulus for the rapid development of commodity market studies. Moreover, large capital inflow produced substantial liquidity for those markets and liquidity is an influential factor of market volatility. In this paper, 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 substantiate that commodity financialization increased the commodity market fluctuations and more importantly, it created a closer relation between commodity market and stock market. We further unveil the fact that there is an asymmetrical capital attracting mechanism across different commodity markets and thus different markets may exhibit different weights 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 stock market. In addition, we use subsample analysis by dividing our sample according to the commodity financialization period. Then, we compare the commodity financialization effect measured by market liquidity regarding the pre-financialization and post-financialization period. Our results illustrate considerably liquidity impacts on market volatility and correlation with stock market after financialization, for gold, sugar and wheat markets, which largely differentiates from the pre-financialization period. Therefore, we assert that policy makers can put heavy attentions on these markets and monetary policy effect can propagate through this spillover effect.

Citation

Ding, S., Zheng, D., Cui, T., & Du, M. (2020). The effects of commodity financialization on commodity market volatility. In International Congress of Energy Economy and Security: Proceedings Book (153-178)

• Conference Name: ENSCON’ 20 Online International Congress of Energy Economy and Security
• Conference Location: Istanbul, Turkey [Online]
• Start Date: Nov 14, 2020
• End Date: Nov 15, 2020
• Online Publication Date: Nov 30, 2020
• Publication Date: Nov 30, 2020
• Deposit Date: Nov 29, 2022
• Pages: 153-178
• Book Title: International Congress of Energy Economy and Security: Proceedings Book
• ISBN: 978-605-7858-50-4
• Keywords: Commodity Futures Markets; Financialization of Commodities; Conditional Volatility; Dynamic Conditional Correlation
• Public URL: http://researchrepository.napier.ac.uk/Output/2967839