Financial regulatory arbitrage and the financialization of commodities

Zunxin Zheng, Gaiyan Zhang and Yingzhao Ni

Journal of Futures Markets, 2024, vol. 44, issue 5, 826-853

Abstract: We explore the effects of financial regulatory arbitrage on commodity pricing. We examine two types of financial arbitrage: capital‐control arbitrage, in which commodities are imported to circumvent capital controls and profit from disparities in interest rates between domestic and international markets, and dual‐track interest‐rate arbitrage, in which commodities are utilized as collateral to capitalize on domestic dual‐track interest‐rate spreads. Our findings demonstrate that both forms of arbitrage positively affect commodity price returns. However, they affect the inverse relationship between inventory and convenience yield differently. While capital‐control arbitrage can either amplify or weaken this relationship, dual‐track arbitrage makes it less negative.

Date: 2024
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