Index Investment and Financialization of Commodities

Crude oil: Commodity or financial asset?

“…Between 2003 and late 2008, the correlations estimated by the expanded Kalman Filter and rolling windows often are negative. These negative correlations are consistent with the negative relation found by previous studies (Ferson and Harvey, 1995;Kaneko and Lee, 1995;Jones and Kaul, 1996;Sandorsky, 1999;De Roon et al, 2000;Ciner, 2001;Kilian and Park, 2007;Miller and Ratti, 2009 From 2009 through the end of the sample period in August 2011, all models indicate positive correlations between WTI and SP500, which are consistent with more recent results (Chen et al, 1986;El-Sharif et al, 2005;Narayan and Narayan, 2010;Lee and Chiou, 2011;Arouri and Rault, 2012;Büyükşahin and Robe, 2011;Tang and Xiong, 2012). This result is confirmed by results from the Kalman Filter that starts in 2006 (Fig.…”

“…Starting in 2004, correlations between oil prices and financial assets increase, as estimated from daily data in thirty-day rollingwindows (UNCTAD, 2011). Analyzing estimates from one-year rolling windows of daily data, Tang and Xiong (2012) find that correlations between the prices for crude oil and other commodities strengthen over time. Büyükşahin and Robe (2011) identify a sharp increase in correlations between equity and commodity markets that start in the fall of 2008.…”

“…For example, Tang and Xiong (2012) postulate that the flip from a negative to positive correlation is caused by a general financialization of the oil market. Alternatively, the change in sign may be caused by an exogenous variable, such as the increasing participation by hedge funds (Büyükşahin and Robe, 2011).…”

Exogenous impacts on the links between energy and agricultural commodity markets

“…Tang and Xiong (2012) compare the increase in correlations between indexed and off-index commodities to identify the effects of index investment. Their analysis highlights the linkages among commodity markets as a result of the financialization process.…”

“…Against the backup of commodity financialization, the financial crisis remains the dominant exogenous factor affecting the correlations between the energy and agriculture markets. Perhaps, the strongest evidence is a subsequent study by Tang and Xiong (2012) which concludes that the increasing trend is significantly stronger for indexed commodities than for off-index commodities before September 2008. The increased correlation during the recent financial crisis shows that commodity markets became integrated.…”