【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.

【Keywords】

commodities, convenience yield, financial demand

【Authors】

Liu Peng, SC Johnson College of Business and School of Hotel Administration, Cornell University

Qiu Zhigang, Research Fellow of IMI, School of Finance, Renmin University of China

Xu Xiaoyu, Department of Finance, Red McCombs School of Business, University of Texas