In this paper, we show that large inflows into commodity investments, a recent phenomenon known as financialization, has changed the behavior and dependence structure between commodities and the general stock market. The common perception is that the increase in comovements is the result of distressed investors selling both assets during the 2007-2009 financial crisis. We show that financial distress alone cannot explain the size and persistence of comovements. Instead, we argue that commodities have become an investment style for institutional investors. Given that institutional investors continue to target funds into commodities, we predict spillovers between commodities and the stock market to remain high in the future.
Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Non-Technical SummaryOne of the important lessons from the 2007-2009 financial crisis is that systemic risk and spillover effects are significantly underestimated in most widely used risk measures and that standard risk measurement instruments, such as value-at-risk (VaR), need to be adjusted to adequately reflect overall risk. In this paper, we propose a state-dependent sensitivity (SDS) VaR for quantifying risk spillovers among sets of different financial institutions.We estimate a system of quantile regressions for four sets of financial institutions (commercial banks, investment banks, hedge funds, and insurance companies), in which each type of financial institution is represented by an index of several firms. In addition, our empirical model explicitly accounts for the effects of different market states (tranquil, normal, and volatile) on the magnitude of risk spillovers. We trace out the time path of how shocks move through the system using impulse response functions. The SDSVaR model explicitly reveals the magnitude of risk spillovers at a certain point in time. Moreover, in contrast to dynamic correlations, we are able to obtain the direction of spillovers from one set of institutions to another. Hence, the approach permits a delineation of spillover effects from shocks affecting the financial sector as a whole.As opaque and highly leveraged investment partnerships, hedge funds recently received attention as a potential source of contagion, a transmission channel of risk between different asset classes and as a potential amplifier of systemic risk in financial markets. If highly leveraged hedge funds are forced to liquidate large position at fire-sale prices, counterparties sustain heavy losses. This may lead to further defaults or threaten systemically important institutions not only directly as counterparties or creditors but also indirectly through asset price adjustments (Bernanke, 2006). While most observers tend to agree that hedge funds have some systemic importance, little evidence exists on the magnitude of potential spillover effects. In this paper we provide the first empirical estimates of the size of intra-month spillover effects from hedge funds to other financial institutions.In contrast to other recently proposed measures (e.g. Adrian and Brunnermeier 2010), the SDSVaR proposed in this paper models the distribution of the value-at-risk. After calculating the VaR for each set of institutions...
No abstract
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.
hi@scite.ai
10624 S. Eastern Ave., Ste. A-614
Henderson, NV 89052, USA
Copyright © 2024 scite LLC. All rights reserved.
Made with 💙 for researchers
Part of the Research Solutions Family.