Post by Sapphire Capital on Jun 8, 2012 6:13:19 GMT 4
New Evidence on the Financialization of Commodity Markets
Brian J. Henderson
George Washington University - Department of Finance
Neil D. Pearson
University of Illinois at Urbana-Champaign - Department of Finance
Li Wang
University of Illinois at Urbana-Champaign
January 23, 2012
Abstract:
Following the recent, dramatic increase in commodity investments by financial institutions, academics, practitioners, and regulators have engaged in a heated debate over whether financial institutions’ trades and holdings have affected commodity prices and their return dynamics. Distinct from the prior literature, this paper examines the price impact of commodity investments on the commodities futures markets using a novel dataset of Commodity-Linked Notes (CLNs). CLN issuers hedge their liabilities by taking long positions in the underlying commodity futures on the pricing dates. These hedging trades are plausibly exogenous to the contemporaneous and subsequent price movements, allowing us to identify the price impact of the hedging trades. We find that these hedging trades cause significant price changes in the underlying futures markets, and therefore provide direct evidence of the impact of “financial” trades on commodity futures prices.
Attachments:
