Abstract
The goal of the first part of this chapter is threefold: (a) to introduce the term structure of forward/futures commodity prices, the contango/backwardation duality and the notion of rolling yield as it pertains to trading through commodity indexes; (b) to use principal component analysis and the computation of equity and commodity “betas” to provide empirical evidence of the dramatic changes which occurred in the mid-2000s; (c) finally, to review the major arguments which have been put forth in the debate over the financialization of these markets. While conspicuously absent from some of the English language dictionaries, the word financialization has been widely used to describe the increasing role of institutional investors in the commodity markets. Using econometric data analyses for the purpose of illustration, we concentrate on futures price data from the post-2004 period during which the commodity markets experienced a significant influx of new financial investors. As far as we know, mathematical models attempting to reproduce or illustrate (let alone explain) the empirical observations at the core of the debate are few and far between. As a result, our approach remains mostly descriptive of the data which have been used to back up the claims of the various sides of the argument. The originality of our contribution, if any, is the discussion of a new generation of roll yield maximizing commodity indexes, the empirical analysis of the term structure of open interest, and the possible connections between the two.
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Notes
- 1.
In Keynesian economics, the expected future spot price of a commodity should be higher than the forward price. Indeed, according to this theory, the producers of commodities are eager to sell, and willing to sell at a loss if necessary. As a result, the price of a forward or futures contract is below the expected spot price at contract maturity, and the resulting futures or forward curve is downward sloping (i.e. inverted), since contracts for further dates trade at lower prices. In practice, the term backwardation is often used to refer to situations when the current spot price exceeds the price of the future.
- 2.
On July 1st, 2014, 1 year after submission of the original version of this chapter, and 1 month before its revision, Bloomberg took over the calculation, distribution, governance and licensing of this index. In the process, it was renamed Bloomberg Commodity Index (BCOM). It is now part of the Bloomberg commodity index family.
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Acknowledgements
The work of Prof. Carmona is partially supported by NSF - DMS 0806591. The author would like to thank the referee for a thorough reading of the first version of the manuscript, and for insightful suggestions which led to a more readable write up.
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Carmona, R. (2015). Financialization of the Commodities Markets: A Non-technical Introduction. In: Aïd, R., Ludkovski, M., Sircar, R. (eds) Commodities, Energy and Environmental Finance. Fields Institute Communications, vol 74. Springer, New York, NY. https://doi.org/10.1007/978-1-4939-2733-3_1
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