Financial Crash, Commody Prices, and Global Inbalances

macroeconomics, financial crash, markets, commodities, world

Commodity Price Responses to Monetary Policy Surprises

Commodity prices are important both as a source of shocks and for the propagation of shocks originating elsewhere in the economy. Many vector autoregression (VAR) studies estimate a gradual response of commodity prices to monetary policy shocks. Exploiting information in high-frequency financial market data, and using the methods of Rigobon and Sack (2004) I find that a 10 basis point surprise change in interest rates causes commodity prices to fall immediately by about 0.5%. This is about two-thirds of the estimated response of the S&P500, and about five times larger than the response in a VAR 12 months after the shock. Metals prices tend to respond more than agricultural commodities. The point estimate for oil prices is similar to other commodities, but is estimated imprecisely.

Price Bubbles in Chinese Agricultural Commodity Market

This cumulative dissertation presents four contributions that attempt to shed light on the issues regarding price bubbles in Chinese agricultural commodity market. Given that the public and policymakers show their concern on the price bubbles in Chinese agricultural commodity market, chapter 2 and 3 investigate the origin of price bubbles in futures and spot markets, respectively. In particular, after accurately identifying the bubble dates in agricultural futures market and fixing the estimation bias of rare events models, our empirical results in chapter 2 indicate that bubble episodes only account for a very limited proportion of the sample period, meanwhile, China’s corn and soybeans markets respond differently to the speculative activity and external shocks from international markets. Price bubbles are more likely to be associated with strong economic activity, high interest rates and low inflation levels. Furthermore, by gauging the synchronization level of bubble occurrences between futures and spot markets in chapter 3, we find that even cointegrated futures and spot prices for agricultural commodities seldom bubble together. Further analysis through a regime-switching approach of price transmission reveals that the adjustment effect of futures prices on spot prices is the lowest during the regime where bubbles occur the most frequently for spot prices, while the spot price returns are more likely to be affected by its own lagged terms. All these results challenge the idea that bubbles are originated from over-financialization in futures markets and are then transmitted to spot markets. Therefore, we conclude that futures price bubbles are more sensitive to fundamental factors, while spot price bubbles are more likely to be affected by their own market features. Apart from empirical analyses on the origin of price bubbles, it is widely believed that bubbles could distort resource allocation and a recession usually follows the collapse of bubbles. Inspired by the findings from chapter 2 and 3, chapter 4 attempts to build a systematic theoretical framework that explains the observed economic process with bubbles. From a new perspective of firm growth, we construct a theoretical model to describe the evolvement of bubbles, including their origin, development, collapse, and their effect on the output of economy. Following our research topic, chapter 5 tends to investigate the effects of the newly established futures contract for apples in China. The results of various tests suggest that the apple futures market does not serve well for the price discovery and may reduce the spot price volatility to some extent. In order to improve the efficiency of the apple futures market, the regulators should consider effective measures to attract more commercial traders from different regions in China into the futures market

Commodities and portfolio diversification : myth of fact?

Mestrado em FinançasEste estudo pretende analisar se as matérias-primas apresentam potencial de diversificação para portefólios de ações de investidores com aversão às perdas. A recente financialização do mercado das matérias-primas pode estar a afetar a vida de milhões de famílias a nível global, uma vez que determina o custo de vida. Alargamos a abordagem de Bessler & Wolff (2015) com o uso de indicadores de desempenho com o principal foco no risco de queda. A análise empírica considera a perspetiva das finanças comportamentais na avaliação dos benefícios de diversificação de 16 contratos futuros individuais e um índice de matérias-primas. Este estudo confirma a elevada sensibilidade das matérias-primas às condições económicas do mercado. O sector energético de matérias-primas tem um melhor desempenho durante períodos de expansão económica. Os metais preciosos apresentam benefícios de diversificação tanto em períodos de expansão como de recessão, enquanto as matérias-primas do sector da pecuária apresentam um grande potencial de diversificação durante recessões. No geral concluímos que continuamos a observar benefícios de diversificação, mas estes dependem do período em análise, e têm vindo a decrescer ao longo do tempo.This study aims to investigate whether commodities yield diversification benefits to stock portfolios for loss-averse investors. The recent financialization of the commodity market increased correlations with stocks and thus may be hurting millions of households around the world, as it determines the cost of living. We extend the framework of Bessler & Wolff (2015) by using alternative performance measures mainly related to the downside risk. The empirical analysis accounts for a behavioral finance perspective in the assessment of diversification benefits from 16 individual future contracts and one index future on commodities. Our study confirms the high sensitivity of commodities to market economic conditions. The energy sector performs better under economic expansion periods. Precious metals yield diversification benefits both in expansion and recession periods, while livestock commodities display a high potential to reduce risk especially during recessions. Overall, our findings yield that there is still a diversification benefit, but it is time-dependent and the benefits have been decreasing over time.info:eu-repo/semantics/publishedVersio

Do financial investors destabilize the oil price?

In this paper, we assess whether and to what extent financial activity in the oil futures markets has contributed to destabilize oil prices in recent years. We define a destabilizing financial shock as a shift in oil prices that is not related to current and expected fundamentals, and thereby distorts efficient pricing in the oil market. Using a structural VAR model identified with sign restrictions, we disentangle this non-fundamental financial shock from fundamental shocks to oil supply and demand to determine their relative importance. We find that financial investors in the futures market can destabilize oil spot prices, although only in the short run. Moreover, financial activity appears to have exacerbated the volatility in the oil market over the past decade, particularly in 2007-2008. However, shocks to oil demand and supply remain the main drivers of oil price swings. JEL Classification: C32, Q41, Q31Oil Price, sign restrictions, Speculation, Structural VAR

Financialization, price risks, and global commoditychains: Distributional implications on cotton sectorsin Sub-Saharan Africa

The functioning of commodity markets has changed related to processes of financialization that involve two major developments – the rise of financial interest on commodity derivative markets through the increasing presence of financial investors and the changing business models of international commodity trading houses and the increasing importance of these markets in price setting and risk management since the liberalization of national commodity sectors. A critical question is how these global financialization processes affect commodity producers in low income countries via the operational dynamics of global commodity chains and distinct national market structures. This paper investigates how global financialization processes influence how prices are set and transmitted and how risks are distributed and managed in the cotton sectors in Burkina Faso, Mozambique and Tanzania. It concludes that uneven exposure to price instability and access to price risk management have important distributional implications. Whilst international traders have the capacity to deal with price risks through hedging in addition to expanding their profit possibilities through financial activities on commodity derivative markets, local actors in producer countries face the challenge of price instability and increased short-termism – albeit to different extents deepening on local market structures – with limited access to risk management

FINANCIALIZATION OF THE COMMODITIES FUTURES MARKETS AND ITS EFFECTS ON PRICES

After declining for almost three decades, the food price index of the Food and Agricultural Organization (FAO) rose by 90 percent between January 2002 and June 2008. Besides the magnitude, the rise in prices was remarkable for its breadth, affecting a broad range of commodities including agricultural (wheat, corn, soybeans, cocoa, coffee), energy (crude oil, gasoline), and metals (copper, aluminum). According to the US Department of Agriculture, this price spike was responsible for increasing the number of malnourished people by 80 million. These dramatic developments in prices coincided with a rapid inflow of investment into the commodities futures market -- the number of open contracts between 2001 and June 2008 increased by more than six-fold, from around 6 million to 37 million. The new investment was primarily driven by portfolio diversification motives of a new class of traders who were neither producers nor direct consumers of the underlying commodities. This dissertation examines the potential causal links between this financialization of the commodities futures market and the 2008 global spike in food prices and other commodities. The dissertation consists of three major chapters. The second chapter analyses the relationship between spot and futures markets for a range of commodities. The third and fourth chapters seek to understand the role of financialization in causing the 2008 price developments. Chapter 3 explores commodity markets individually, studying the correlation between the inflow of liquidity and price changes. Chapter 4 studies the issue at a more macro level by investigating if the inflow of investment can explain the increase in comovement of prices between unrelated commodities. My results show that i) for many commodities, prices are determined in the futures markets, and ii) financialization of the futures market was an important factor in causing the 2008 price rises for a range of commodities. These results underscore the increasingly important role of financial motive, financial markets, and financial instruments in the operation of the commodities market. The findings are especially relevant with respect to debates as to the relative efficiency of financial markets and the need to regulate them

Commodity trading: the role of physical assets acquisitions for energy trading companies

Commodity trading companies exist because natural resources are not well allocated. Producing countries are not those that consume the most, and the largest consuming regions are not supplied enough by their own natural resources reserves. In order to smooth out regional imbalances and fulfil supply and demand mismatches, commodity traders have to perform several activities in the supply chain. In addition to managing the logistics, their role has evolved over the years. Traditionally, trading firms relied only on pure trading, with asset-light structures, to make profits with arbitrage opportunities. Recently, they diversified in terms of the activities they perform, the geographical markets they target and the commodities they trade. To answer to the increasing complexity of markets and an intense competition, independent trading houses are increasingly investing in physical assets throughout the value chain: they now own and operate production fields, storage facilities, port terminals, refineries and distribution networks. With industrial and infrastructure acquisitions, energy trading firms can obtain several benefits. They are able to develop market knowledge, they diversify their activities, they secure access to sourcing and they optimise their supply chain. Ultimately, traders that engage in the supply chain are able to gain flexibility to quickly take advantage of changing market opportunities and generate extra profits. The assets they target are also the ones that provide optionality, in countries where infrastructure and logistical challenges discourage other actors to invest. As they improve the capacity of traders to spot market imbalances, physical assets also bring an increased level of risk and new challenges. In particular, trading firms have to mitigate higher operational and country risks, integrate new competencies and find alternative sources of financing. By investing in physical assets, energy traders extend their scope and become involved at various levels of the supply chain. However, their business model remains distinct from those of vertically integrated producers, as their objectives when investing follow different business logics. Whether investment strategies are profitable remains to be evidenced and will require further research, as the direct impact of physical assets acquisitions on margins is difficultly quantifiable. Moreover, the way the firms’ profits evolve may take different paths: some companies have seen their bottom line increase in the past few years, while others recently posted their worst results in a decade

Commodities as an Asset Class

Commodities have become increasingly important as an additional source of diversification. However, commodities are relatively unexplored as an asset class. Within the context of the financialization of commodity markets, we study three fundamental questions about commodities as an asset class: What determines commodity prices, why do some commodities offer higher returns than other commodities, and is there momentum in commodity markets? In this thesis, the net convenience yield as a latent payoff of a commodity is in particular taken into account to answer these questions

Monetary policy report to the Congress

Monetary policy - United States ; Economic conditions - United States