Volatility Spillovers Arising from the Financialization of Commodities

This paper examines whether the proliferation of new index products, such as commodity-tracking exchange-traded funds (ETFs) amplified the volatility transmission channel introduced by financialization. This paper focuses on the volatility spillover effects among crude oil, metals, agriculture, and non-energy commodity markets. The results show financialization has an impact on the volatility of commodity prices, predominantly for non-energy commodities. However, the impact on volatility is not symmetric across all commodities. The analysis of index investment and investors’ positions in futures markets shows that when a relationship exists it is generally negatively correlated with the realized volatility of non-energy commodities. Using realized volatility in Tang and Xiong’s (2012) difference-in-difference model provides estimates that are inconsistent with the original findings that non-energy commodities traded as a part of indices have experienced higher volatility. The results are similar to the index investment and futures market analysis where increased participation by investors through new investment products has put download pressure on realized volatility.