Index Investment and Financialization of Commodities
This paper finds that, concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJ-UBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008. In contrast, such commodity price comovements were absent in China, which refutes growing commodity demands from emerging economies as the driver.
We wish to thank Nick Barberis, Alan Blinder, Markus Brunnermeier, Ing-Haw Cheng, Campbell Harvey, Zhiguo He, Han Hong, Alice Hsiaw, Ralph Koijen, Pete Kyle, Arvind Krishnamurthy, Tong Li, Burt Malkiel, Bob McDonald, Lin Peng, Geert Rouwenhorst, Mark Watson, Philip Yan, Moto Yogo, Jialin Yu, and seminar participants at Commodity Futures Trading Commissions, Duke/UNC Asset Pricing Conference, Federal Reserve Bank of San Francisco, Kellogg School, NBER Summer Institute Workshop on Capital Markets and the Economy, Princeton University, and University of Texas-Dallas for helpful discussion and comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.