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Index Investment and Financialization of Commodities

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Publication date
10/01/2011
Number of Pages
46
Language:
English
Type of Publication:
Studies
Focus Region:
North America
Focus Topic:
Market / Trade
Type of Risk:
Market-related
Type of Risk Managment Option:
Risk assessment
Commodity:
Crops
Author
Ke Tang and Wei Xiong
Organization
Princeton University

This paper finds that concurrent with the rapid growing index investment in commodities markets since early 2000s, futures prices of different commodities in the US became increasingly correlated with each other and this trend was significantly more pronounced for commodities in the two popular GSCI and DJUBS commodity indices. This finding reflects a financialization process of commodities markets and helps explain the synchronized price boom and bust of a broad set of seemingly unrelated commodities in the US in 2006-2008.