The Role of Index Traders in the Financialization of Commodity Markets: A Behavioral Finance Approach, Energy Economics, 2024, (with M. Joëts)
Abstract:
This paper investigates the impact of financialization on commodity prices across various markets, particularly over recent decades. We introduce a groundbreaking theoretical model that incorporates both chartist-fundamentalist traders and institutional investors, targeting trading signals in two distinct commodity markets. In alignment with empirical data, our model enables institutional investors to participate in multiple markets simultaneously through index investing. Our findings indicate that the interactions between traditional traders and index investors create price dynamics that closely mirror observed patterns in commodity markets. Specifically, index investors not only cause prices to diverge from their fundamental values but also substantially influence the trading posi- tions of other market actors. Moreover, we elucidate the crucial role of index investors in amplifying market correlations–both among different commodities and between commodities and equities, especially during periods of intense price fluctuations. Our innovative theoretical model goes beyond conventional chartist-fundamentalist frameworks, offering a robust alternative for understanding the complex pricing dynamics of commodities at large.
How Commodity Index Impacts Investments: A Story About The Financialization of Agricultural Commodities", Economic Modelling, 2020, 80, pp 23-33
Abstract:
This paper focuses on the impact of financial investors on agricultural prices, a phenomenon known as the financialization. In this aim, we check whether financial mechanisms drive extreme values and the mean of agricultural returns in the same way. Relying on the Threshold AutoRegressive Quantile (TQAR) methodology, we find evidence of reinforcement linkages between equity and agricultural markets since 2004, corresponding to the rise in inflows of institutional investors in commodity markets. These results show that agents impact more deeply commodity markets when the commodity index value is high. In addition, in extreme quantiles (0.75 and 0.90) of agricultural returns, the relationship between agricultural and stock returns is always significant when the commodity index return is in the higher regime. This finding suggests that, stock markets had a greater impact on agricultural price dynamics during the extreme movements which occurred during the 2007–2008 financial crisis, highlighting a potential influence of financial markets on the financialization of commodities.
The Influence of Financial Activity on The Volatility of Food Prices, December 2017, Mondes En Développement, 2017, 179(3):45, pp 45-66 (with G. Del Lo)
Abstract:
The intensification of the relationship between financial and agricultural markets seems to be an important determinant of agricultural commodity prices. In order to study this potential phenomenon, a DCC-GARCH model linked with a causality test in variance is used. The results of this article show a causal relationship between the volatility of agricultural products and the financial markets, suggesting a potential implication of the financial markets in the recent rises in agricultural product prices.
Disentangling the Impact of Clearing Houses Innovations in Futures Markets (with J-B. Bonnier)
Abstract:
This paper examines the impact of clearing house (CH) innovations—multilateral netting and novation—on the grain futures market at the Chicago Board of Trade (CBOT). Using a difference-in-differences (DID) approach, we compare the CBOT to other Midwest grain markets to identify causal effects of the CH functions. Our findings show that the introduction of multilateral netting led to a decrease in futures prices and an increase in trade flows to Chicago, suggesting enhanced market participation due to reduced counterparty and liquidity risk. In contrast, the implementation of novation led to rising prices and falling open interest, suggesting deterrent effects from increased transparency and higher trading costs. By isolating each CH function’s impact and supporting it with narrative evidence, this paper contributes to the literature on financial market structure. It offers a historical perspective on how central clearing mechanisms can influence market dominance in commodity futures markets.
Climate anomalies and Price dynamics: Insights from Sub-Saharan African Currency Unions (with X-E Compaore and H. Bennani)
Abstract:
This paper examines the dynamic impact of climate anomalies on consumer prices within two Sub-Saharan African (SSA) currency unions: the West African Monetary Union (WAMU) and the Central African Monetary Union (CAMU). Using a local projections method on a monthly panel dataset spanning 2002M1–2019M12, we find that temperature and precipitation anomalies lead to short-term increases in consumer prices of up to 1 percentage point and 0.1 percentage point, respectively, at the currency union level. Country-level estimations reveal significant heterogeneity, with some economies experiencing inflationary pressures lasting beyond two years. While countries’ reliance on the agricultural sector appears to be the main transmission channel of these inflationary effects, interestingly, economic development, energy consumption, and political stability emerge as effective mitigating factors. Given the limited monetary policy autonomy of the two currency unions, targeted adaptation strategies—such as investments in climate-resilient agriculture and renewable energy—are essential to prevent these climate-related inflationary risks.
The impact of the international commodity volatility on cereal markets of developing countries (with O. Damette)
Abstract:
In this chapter we analyze to what extent the international commodity climate influences commodities and through which channel. Is the financialization of commodities one of these channels? For this purpose, we use a nonlinear panel methodology, namely the Panel Smooth Transition Regression (PSTR) model. In doing so we study the transmission of returns from international to domestic markets for a panel of developing countries, conditionally to our transition variable, which is S&P GSCI volatility. Applying our empirical methodology to a panel of developing countries over the 2000-2017 period, we find evidence of the influence of financial commodity volatility on the transmission of returns from the international to the national level. We also apply the PSTR estimation with International Monetary Fund (IMF) commodity index volatility as the transition variable, where we find a negative pass-through effect. Thus, not all commodity indices are the same. The main difference between the two indices is that one is an underlying financial product, the S&P GSCI, and the other one is not. By comparing the results of these two regressions, we highlight a potential financialization effect of the transmission of price movements from the international to the national level. In doing so we enhance the literature on both the financialization of commodities and the transmission from international to domestic commodity markets.
Risk, Uncertainty and Farmers' Willingness to Engage in Contractual Low-Carbon Farming Programmes