Financialisation of natural resources & instability caused by risk transfer in commodity markets

Abstract

Understanding the connectedness of financial markets and hence possible sources of systematic risk is central to the debate on the process of financialisation and its consequences for financial stability. In this study, we examine the connectedness between commodity spot and futures prices by applying a novel frequency connectedness framework on data from January 1979 to December 2019 to measure the connectedness among financial variables. Focusing on the seven most widely traded commodities, including gold, silver, crude oil (WTI and BRENT), corn, soya and iron, we find that (i) volatility of the commodity derivatives (futures) contribute to the spot volatility and hence influence spot prices of the underlying commodities in international markets (ii) volatility spillover effects are stronger in the first four days of the shock, suggesting that shocks to the underlying asset volatility caused by its own fundamental are more prevalent and persistent in the long-term (iii) commodities futures volatility transmission is higher than spot price volatility transmission to the futures prices. Our findings shed new light on the relationship between the actual spot price of commodities and their derivatives and have crucial socio-economic implications in terms of financialisation of important commodities.