September 13, 2011 Financialization of Commodity
Author : luanne-stotts | Published Date : 2025-06-27
Description: September 13 2011 Financialization of Commodity Markets José Antonio Murillo G20 Conference on Commodity Price Volatility Theory Empirical Studies Concluding Remarks Introduction Index 2 3 1 Introduction 3 Level and volatility of
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Transcript:September 13, 2011 Financialization of Commodity:
September 13, 2011 Financialization of Commodity Markets José Antonio Murillo G-20 Conference on Commodity Price Volatility Theory Empirical Studies Concluding Remarks Introduction Index 2 3 1. Introduction 3 Level and volatility of commodity prices have increased in recent years. As a result of this situation, the G-20 created a study group to analyze the factors behind these phenomena. Main conclusions of this report coordinated by Mr. Hiroshi Nakaso (G-20, 2011): The key factor behind this behavior is a change in fundamentals. A sharp increase in financialization of commodities has also been observed. The report reviews opposed studies regarding the impact of this event on commodity prices without arriving to a conclusion. 3 4 4 General Commodity Price Index in Real Terms (2002=100) Source: IMF. Futures and Option Contracts Outstanding in Commodity Exchanges (Number of contracts in millions) Source: Bank for International Settlements. 1. Introduction 4 5 1. Introduction 5 What has been the impact of financialization on price levels and volatility? Theory states that, by providing liquidity, financialization of commodities contributes to the efficient allocation of resources. Nonetheless, volatility could be exacerbated in the presence of certain market failures. Empirical studies are not conclusive, some find weak evidence of financialization being a driver of observed price developments while others find no relation. Yet, some voices argue for stricter trading regulations. 5 Theory Concluding Remarks Introduction Index 6 Empirical Studies 7 2. Theory 7 The participation of financial investors in commodity markets is expected to: Satisfy the hedging needs of market participants. Lower price volatility and add liquidity (Friedman, 1953; Hicks 1939; Kaldor, 1939; Keynes, 1930). Enable investors to further diversify their portfolios. Improve the quality of price signals (Fama, 1970, 1991). Greater financialization fosters in the medium term the production of commodities. 7 2. Theory Potential market failures: Market imbalances (G-20, 2011). Liquidity adds depth to the market. Distortion of price signals (Black, 1986; De Long, et. al., 1990; G-20, 2011; Kyle and Xiong, 2001; UNCTAD, 2011). Transparency and timely availability of information. Deeper financialization limits the adverse effects of market failures. 8 9 2. Theory 9 9 Theoretical conditions under which speculation could have an impact on commodity prices are (Hamilton, 2009): Low price elasticity of demand. For non-renewables, Hotelling principle. However, the same conditions exacerbate the impact of fundamentals on commodity prices. Hence, which is the culprit financialization or the low price elasticity of demand and unresponsive supply?
