Convective Risk Flows in Commodity Futures Markets*

Cheng, Ing-Haw; Kirilenko, Andrei; Xiong, Wei

doi:10.1093/rof/rfu043

“…This financialization could potentially reflect a number of factors such as changing risk premiums following the global financial crisis or increasing financial investments into commodity futures. Cheng et al (2015) reported that the risk premiums varied over time as the financial investors' risk bearing capacity is time varying.…”

Section: The Joint Hypothesis Testmentioning

confidence: 99%

Testing Efficiency of the London Metal Exchange: New Evidence

Park

¹

,

Lim

²

2018

IJFS

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This paper explores the market efficiency of the six base metals traded on the LME (London Metal Exchange) using daily data from January 2000 to June 2016. The hypothesis that futures prices 3M (3-month) are unbiased predictors of spot prices (cash) in the LME is rejected based on the false premise that the financialization of commodities has been growing. For the robustness check, monthly data is analyzed using ordinary least squares (OLS) and GARCH (1,1) models. We reject the null hypothesis for all metals except for zinc.

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“…We also explore whether the "financialization" of futures markets (as represented by the changing mix of participant positions) has affected the functioning of the futures markets, as suggested in Singleton (2014) and Cheng, Kirilenko and Xiong (2014). 9 In every instance we find that speculative position changes do not amplify volatility during the crisis and so do not impede the functioning of futures markets.…”

mentioning

confidence: 94%

Speculators, Prices, and Market Volatility

Brunetti

¹

,

Büyükşahin²,

Harris³

2016

J. Financ. Quant. Anal.

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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 SummaryAs the recent financial crisis demonstrates, failures within the financial system can have devastating effects on the real economy. The crisis has elevated concerns about the trading behavior of financial market participants, particularly those operating outside the public eye. The burgeoning hedge fund industry, for instance, operates largely outside the jurisdiction of the U.S. Securities and Exchange Commission, with few public reporting requirements. Likewise, swap dealers operate in relatively opaque over-the-counter markets, fueling anxiety about their influence as well.In this paper, we analyze the trading of both hedge funds and swap dealers in futures markets from 2005 through 2009 to assess how these traders affect market volatility and prices. We use daily long and short positions of these traders with data from the U.S. Commodity Futures Trading Commission to analyze trading in crude oil, natural gas and corn markets-each of which experienced significant price volatility during the recent crisis. While this volatility was accompanied by increased hedge fund and swap dealer participation, we specifically test for lead-lag and contemporaneous relations between trader positions and both market volatility and prices during various subperiods when prices and volatility were inflated.We find that contemporaneous hedge fund positions were positively correlated with prices but negatively correlated with volatility. These results suggest that hedge funds provide liquidity to the market and facilitate price efficiency. Swap dealer positions, however, are largely unrelated to market returns and volatility. In contrast to the stabilizing influence of hedge funds, merchant positions (in crude oil and natural gas) are significantly positively related to market volatility. These results are consistent with Hirshleifer (1989Hirshleifer ( , 1990, where speculators are drawn to futures markets and the risk premiums are generated by hedging demand from other traders.We also examine whether the "financialization" of futures markets (as represented by the changing mix of participant positions) has affected the functioning of the futures markets. In every instance, we find that speculative position changes do not amplify volatility during the crisis and so do not impede the functioning of futures markets. Conversely, in each market we find that macroeconomic conditions are significantly related to future...

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“…long-only investors such as pension funds and insurance companies, more than quadrupled and the number of hedge funds more than tripled. In contrast, during the same time period, the amount of traders engaged in futures markets to hedge commodity price risk less than doubled (Cheng, Kirilenko, and Xiong, 2012).…”

Section: Introductionmentioning

confidence: 98%

Financialization in Commodity Markets: Disentangling the Crisis from the Style Effect

Adams

¹

,

Glück

²

2014

SSRN Journal

0

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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. 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. Terms of use: Documents in EconStor may

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Convective Risk Flows in Commodity Futures Markets*

Cited by 200 publications

References 36 publications

Testing Efficiency of the London Metal Exchange: New Evidence

Testing Efficiency of the London Metal Exchange: New Evidence

Speculators, Prices, and Market Volatility

Financialization in Commodity Markets: Disentangling the Crisis from the Style Effect

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