The effects of commodity financialization on commodity market volatility

Shusheng DING, Tianxiang Cui, Dandan Zheng, Min Du

Research output: Journal PublicationArticlepeer-review

5 Citations (Scopus)

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.

Original languageEnglish
Article number102220
JournalResources Policy
Volume73
DOIs
Publication statusPublished - Oct 2021

Keywords

  • Commodity futures markets
  • Conditional volatility
  • Dynamic conditional correlation
  • Financialization of commodities

ASJC Scopus subject areas

  • Sociology and Political Science
  • Economics and Econometrics
  • Management, Monitoring, Policy and Law
  • Law

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