Financialisation of the commodity markets. Conclusions from the VARX DCC GARCH

Karol Szafranek

No 213, NBP Working Papers from Narodowy Bank Polski

Abstract: The global economy is highly dependent on commodity prices, which are, by and large, the outcome of market-specific supply and demand fundamentals. As a result, driven by different determinants, financial assets and commodity prices should be negligibly correlated. However, systematically growing engagement of noncommercial investors equipped with financial engineering innovations on commodity markets, generous inflow of capital resulting from the necessity for wider diversification of investment portfolios combined with the strengthening influence of purely financial and speculative motives have led in the 2000’s to a much stronger correlation between the financial and commodity markets, sparking a heated debate on the commodity markets financialisation. The empirical analysis presented here supports the claim that since 2005 commodity markets have been under heavier influence of macroeconomic, financial and speculative determinants. However, the process loses on strength since 2011. Results of the Varx Dcc Garch model with leverage effect and multivariate t error distribution demonstrate that the inclusion of the commodity markets’ growing sensitivity to macroeconomic conditions, financial markets turmoil and the impact of speculative aspects alters the dynamic conditional correlation path between commodities and the financial markets from 2005 to 2011 signaling the process of financialisation. Additional conclusions are drawn regarding the stability of the market interdependence as well as the parameter estimates.

Keywords: Icommodity markets; financialisation; Varx; Dcc; price dynamics determinants (search for similar items in EconPapers)
JEL-codes: C32 C58 E44 Q02 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ets and nep-mac
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Citations: View citations in EconPapers (1)

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Working Paper: Financialisation of the commodity markets. Conclusions from the VARX DCC GARCH (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:nbp:nbpmis:213

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