Commodity market financialization, herding and signals: An asymmetric GARCH R-vine copula approach

Qin Xiao, Meilan Yan and Dalu Zhang

International Review of Financial Analysis, 2023, vol. 89, issue C

Abstract: Institutional investors have significantly increased their exposure to commodity futures after 2004 in the process of commodity market financialization, raising questions about the risk-sharing and price-discovery functions of the market. We identify some symptoms of financialization through examining S&P500, JPM bond index, and 18 S&P GSCI excess return indices, employing ARMA-GARCH R-vine copula approach that can flexibly model high-dimensional multivariate asymmetric tail dependence. We discover three trends: an increased resemblance between the news impact curve of stocks and those of commodities; an increased bi-variate stock-commodity tail dependence; and an increased multivariate tail-dependence across all commodities. We also explore the market structural change underlying these symptoms using an augmented news impact curve. We suggest and provide evidence that herding, in addiction to leverage effect, explains the observed symptoms. The findings have profound implications for commercial hedgers and financial traders, and for regulators who are concerned about the functionalities of commodity futures market.

Keywords: Commodity market financialization; Herding; Asymmetric tail dependence; Risk-sharing; Information friction (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:89:y:2023:i:c:s1057521923002594

DOI: 10.1016/j.irfa.2023.102743

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