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Commodity Market Linkages in the Global Financial Crisis: Excess Volatility and Development Impacts

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  • Machiko Nissanke

Abstract

This article examines how the increased interactions of financial and commodity markets have served as one fast transmission channel of the global financial crisis to the developing world. It suggests that a significant portion of the closely synchronised price dynamics in commodity and financial markets is explained by market liquidity cycles in global finance, as financial investors manage their portfolio at ease through ‘virtual’ stock holdings of commodities in derivatives dealings and markets. The article further argues that this has generated price volatility well in excess of what could be explained in demand-supply fundamentals, and that under such conditions futures markets would cease to perform their intended functions -- that of price discovery and risk hedging for physical commodity stakeholders. It explores the development impacts of excess price volatility and the case for innovative price stabilisation mechanisms.

Suggested Citation

  • Machiko Nissanke, 2012. "Commodity Market Linkages in the Global Financial Crisis: Excess Volatility and Development Impacts," Journal of Development Studies, Taylor & Francis Journals, vol. 48(6), pages 732-750, June.
    • Handle: RePEc:taf:jdevst:v:48:y:2012:i:6:p:732-750
    DOI: 10.1080/00220388.2011.649259
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    References listed on IDEAS

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    1. Ke Tang & Wei Xiong, 2012. "Index Investment and the Financialization of Commodities," Financial Analysts Journal, Taylor & Francis Journals, vol. 68(6), pages 54-74, November.
    2. World Bank, 2009. "Global Economic Prospects 2009 : Commodities at the Crossroads," World Bank Publications - Books, The World Bank Group, number 2581.
    3. Jörg Mayer, 2009. "The Growing Interdependence Between Financial And Commodity Markets," UNCTAD Discussion Papers 195, United Nations Conference on Trade and Development.
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