The Financialization of Storable Commodities

Steven D. Baker ()
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Steven D. Baker: McIntire School of Commerce, University of Virginia, Charlottesville, Virginia 22904

Management Science, 2021, vol. 67, issue 1, 471-499

Abstract: I solve a dynamic equilibrium model of commodity spot and futures prices, incorporating an active futures market, heterogeneous risk-averse participants, and storage. When calibrated to data from the crude oil market, the model implies that financialization reduces the futures risk premium and increases correlation between futures open interest and the spot price level. However, there is no long-run increase in the mean spot price, and speculative storage generally attenuates financialization’s effect on spot price volatility. Therefore, financialization’s effect on spot price dynamics through storage arbitrage is likely modest, even if futures positions and risk premia are substantially altered.

Keywords: finance; asset pricing; portfolio; industries; petroleum-natural gas (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (16)

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