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Financial investments and commodity prices

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  • Peng Liu
  • Zhigang Qiu
  • David Xiaoyu Xu

Abstract

In this paper, we show that financial investments dilute the relationship between convenience yields (a proxy for fundamentals) and commodity prices. On average, the explanatory power of convenience yields on the movements of commodity prices decreased from 63% to 33% after 2004, when institutional investors rapidly started building their positions in commodity futures. We develop a model of the commodity market with financial investments and test the model predictions using futures prices of 21 US‐traded commodities and index traders' positions on 12 agricultural commodities. Because of correlated financial demands for different commodity futures, we identify comovements in spot prices for fundamentally independent commodities.

Suggested Citation

  • Peng Liu & Zhigang Qiu & David Xiaoyu Xu, 2022. "Financial investments and commodity prices," International Review of Finance, International Review of Finance Ltd., vol. 22(4), pages 637-661, December.
    • Handle: RePEc:bla:irvfin:v:22:y:2022:i:4:p:637-661
    DOI: 10.1111/irfi.12361
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    References listed on IDEAS

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