UNCTAD
Multi-Year Expert Meeting on Commodities
and Development 2013
Recent developments and new challenges in commodity markets, and policy
options for commodity-based inclusive growth and sustainable development
Room XXVI
Palais des Nations
Geneva, Switzerland
Impact of Financialization and Speculation on Prices of
Commodities
Ke Tang
Renmin University of China
20 MARCH 2013
This material has been reproduced in the language and form as it was provided. The views expressed are those of
the author and do not necessarily reflect the views of UNCTAD.
Impact of Financialization and Speculation
on Prices of Commodities
Ke Tang
Renmin University of China
Multi-year Expert Meeting, UNCTAD
March 20, 2013
The Market Growth
2
Commodities as a New Asset Class
 Prior to early 2000s, commodities were segmented from the
broader financial markets and from each other.
 Motivation of portfolio diversification in a low interest rate
period and collapse of the equities market in early 2000s
made financial institutions invest into commodities.
 Commodity producers (mainly from emerging economy) are
lack of sound and liquid financial markets. With commodity
prices went up in recent years, commodity producers turned
to the U.S. financial markets.
 Major financial institutions invested in commodity market
through commodity futures indexes, commodity-linked
notes and exchange traded products.
3
Commodities as a New Asset Class
4
Commodities as a New Asset Class
5
Consequence of Financialization
 Through investment from financial institutions and




6
individuals, commodities are gradually financialized in the
recent decade.
Financialization of commodities should improve the sharing
of commodity price risk.
Correlation (co-movement) between different commodities
increases.
Correlation (co-movement) between commodities and
stocks increases.
Shocks from oil and other financial markets spillover to nonenergy commodities through the financialization process.
Average Commodity Return Correlation
0.6
Average Correlation In-index Commodity
Average Correlation Off-index Commodity
0.5
0.4
0.3
0.2
0.1
0
-0.1
72
7
75
77
80
82
85
87
90
92
95
97
00
02
05
07
10
Commodity- Stocks Correlation
SP500-SPGSCIER Index
0.8
Coefficient 
95% Confidence Level
0.6
Correlation
0.4
0.2
0
-0.2
-0.4
-0.6
88
8
90
92
94
96
98
00
Time
02
04
06
08
10
12
Volatility of Oil and Non-Energy
Commodity Index
9
Speculators Activity-1
Oil
0.9
Speculators
Hedgers
Small Traders
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1992
10
1995
1997
2000
2002
2005
2007
2010
2012
Speculators Activity-2
Copper
0.8
Speculators
Hedgers
Small Traders
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1992
11
1995
1997
2000
2002
2005
2007
2010
2012
Speculators Activity-3
Wheat
0.7
0.6
0.5
0.4
0.3
Speculators
Hedgers
Small Traders
0.2
0.1
0
1992
12
1995
1997
2000
2002
2005
2007
2010
2012
Speculators Activity-4
Coffee
0.7
0.6
0.5
0.4
0.3
Speculators
Hedgers
Small Traders
0.2
0.1
0
1992
13
1995
1997
2000
2002
2005
2007
2010
2012
Behavior of Speculators and Hedgers
 Hedgers: producers, are contrarian traders.
 Speculators: institutional investors, are
momentum (positive feedback) traders.
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Speculation and Liquidity
 The theory of normal backwardation:
 Hedgers sell commodity futures to hedge their physical position,
thus consume liquidity.
 Speculators provide liquidity to the market by offsetting
hedger’s position, thus speculators make market liquid.
 Researchers on liquidity:
 Contrarian traders (hedgers) provide liquidity to the market.
 Momentum traders and institutional investors (speculators)
consume liquidity.
15
Speculation and Liquidity
 By doing empirical test, my recent study shows:
 Speculators consume liquidity. They might drive commodity
prices off its fundamental and form bubbles. Speculators
destabilize prices.
 Hedgers provide liquidity, stabilize prices.
 Speculators impact prices and pay liquidity premium to hedgers.
 In other markets (for example the FX market), researchers
show that speculation is stabilizing at low levels and
destabilizing at high levels.
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 Working’s T index measure whether speculation was
excessive in commodity market.
1.45
Working's T Index for WTI Crude Oil
1.4
1.35
1.3
1.25
1.2
1.15
1.1
1.05
1
92
17
95
97
00
02
05
07
10
12
Conclusion
 Speculators and index traders are mainly financial
institutional investors, their risk attitude, capital
constraints, leverage etc. will influence their
participation in the market, and hence the market prices.
 Speculators offset trades of hedgers, but too many (large)
speculators dry up the market liquidity and destabilize
the prices.
 Position limit and higher margin requirement are
appropriate ways to curb too much speculation.
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